Once again, the U.S. Federal Reserve’s Open Market Committee decided unanimously to leave its policies unchanged, although the Fed has acknowledged the economy is strengthening and prices are rising.
For now, the Fed will continue to hold interest rates just above zero and buy about $120 billion a month in government and corporate bonds.
“Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened,” the committee said in a statement after the meeting, although “the sectors most adversely affected by the pandemic remain weak.”
“The ongoing public health crisis continues to weigh on the economy,” the committee’s statement said.
Observers noted that the committee used the same sentence in its March statement but then the sentence also referred to “employment.” Fed-watchers took the word’s absence to be the bank’s acknowledgment that the labor market is healing.
However, “the recovery is uneven and far from complete,” Fed chair Jerome Powell said in a press conference following the committee’s meeting. “It will take some time before we see substantial further progress.”
The committee’s statement “offered no hints that it was considering slowing the pace of its asset purchases, let alone thinking about interest rates,” Paul Ashworth, Capital Economics’ chief economist, said in comments quoted by CNBC.
The committee also acknowledged that inflation is on the rise, “largely reflecting transitory factors,” and that “overall financial conditions remain accommodative.”
Fed officials have repeated that any price hikes are due to supply-chain disruptions and other hangovers from the economic shutdown and that the rate of inflation will throttle back as those glitches are resolved.
For that reason, the Fed has not altered policy in an attempt to tamp down the current inflation rate, figured at 2.5 percent annually, which is above the Fed’s target rate of 2 percent.
Markets have priced in an inflation rate of 2.5 percent over the next five years, CNBC reported, compared to the 0.8 percent the market was betting on a year ago.
TREND FORECAST: That was last week’s “news.” As we have detailed in this Trends Journal, today, Janet Yellen, former Fed chair and now U.S. Treasury Secretary, clearly signaled a rise in interest rates
Her comment, “It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat,” makes it crystal clear that higher rates are on the horizon. And the higher rates go, the faster equity markets will crumble.
Again, when interest rates move toward 2 percent, the overvalued markets will plunge deep into bear territory.
