The Federal Reserve has foreseen the economy accelerating quicker this year but still expects to keep its benchmark interest rate pinned near zero through 2023, despite the concerns about the financial markets about the potential higher inflation.
On Wednesday, the Fed also said that it foresees the economy growing at a 6.5 percent pace this year, which is up from a previous projection in December of 4.2 percent. Moreover, it also expects inflation to reach 2.4 percent in 2021, which is above its target of two percent but also expects inflation to fall back to around two percent in 2022.
The Central Bank said that it would continue to buy $120 billion in bonds each month to keep the longer-term borrowing costs down. The decision came in as Chair Jerome Powell faces a delicate balancing act: The economy is certainly improving. But if Powell sounds too optimistic, the investors might assume that the Fed will reverse its low-rate policies prematurely. This could further send the bond yields rising and shall potentially weaken the economy as borrowing becomes costlier for the companies and the households.
Yet if Powell sounds good that the job market is recovering slowly, it might still raise concerns that the Fed won’t be watchful enough about the inflation pressures. That perception too could send the bond yields rising as the investors anticipate the rising inflation.
By complicating the scenario, the Fed announced last year that a policy change in how it manages the interest rates by saying that it plans to keep the rates near zero at least for some time even after the inflation exceeds its two percent target level. The reported change meant that the Fed is prepared to tolerate a higher inflation rate than it generally had.
As a consequence of the whole thing, the economists have been upgrading the outlooks with many others predicting that the economy shall expand as much as seven percent for all of 2021 which is supposedly the fastest annual growth since 1984.
Reportedly this week’s Fed policy meeting comes in as the economy’s outlook has improved prominently since it had last met in late January. In February, the job gains had accelerated, the sales at retail stores jumped after the $600 relief checks were being distributed at the beginning of the year and when President Joe Biden had signed his economic relief package.
Furthermore, the brighter outlook has sent the yield on the 10-year Treasury note climbing as the investors have dumped the binds, which are typically safe-haven investments during the downturns. The yield on the 10-year had topped 1.62 percent in trading on Tuesday and it had been below one percent at the end of the last year.
However, the job market still has a long way to go to get a full recovery. With the unemployment level at 6.2 percent, the economy still has 9.5 million fewer jobs than it reportedly had before the pandemic struck.
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