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Fed keeps rates at effective floor in January and sustains commitment to expanding its balance sheet
At its 26–27 January meeting, the Federal Open Market Committee (FOMC) decided to hold the target range for the federal funds rate at its effective floor of 0.00%–0.25%. Moreover, the Fed reaffirmed its commitment to using its full range of powers to support the economic recovery at its current pace. The decision was widely anticipated by market analysts.
The Fed kept the target range at its effective floor due to the economic fallout caused by the ongoing public health crisis, which is expected to keep employment and inflation levels depressed in the short term. Employment levels remain well below their pre-pandemic levels and the pace of recovery has slowed in recent months, while low oil prices and economic slack have dampened inflationary pressures. To ensure sufficient liquidity for households and businesses and the effective transmission of monetary stimulus to broader financial conditions, the Fed reaffirmed its commitment to increase its purchases of Treasury securities, and agency residential and commercial mortgage-backed securities, at least at the current pace of USD 80 billion per month and USD 40 billion per month, respectively. Furthermore, the Bank will also continue to offer large-scale overnight and term repurchase agreement operations.
Looking ahead, the Fed will likely keep the target policy rate at its current level until “labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time”.
Commenting on January’s meeting, Avery Shenfeld, chief economist at CIBC Economics, noted:
“‘Move along, nothing to see here folks’ was the central message from the Fed, which wants to avoid any change in its dovish messaging until an economic and public health recovery is much further along. The FOMC statement isn't accompanied by a fresh forecast, while noting that growth appears to be moderating in recent months due to the pandemic’s impacts. The Fed will want to see more details on both fiscal stimulus and vaccinations before doing any rethinking. That includes keeping the funds rate on hold, and maintaining the pace for its purchases of Treasuries and agency bonds. Nothing for markets to react to here.”
The next FOMC meeting is scheduled for 16–17 March.
FocusEconomics Consensus Forecast panelists project the federal funds target rate to end 2021 at 0.25% and 2022 at 0.25%.
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