Federal Reserve holds off on rate increases, touts strengthening economy

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For those keeping an eye on monetary policy, for now the Federal Reserve is maintaining the status quo vis-á-vis federal funds rates.

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Federal Reserve holds funds rate at 0-0.25%

Federal Reserve facade

Aaron Kohr/Adobe Stock

As the U.S. continues its long-running recovery after last year’s COVID-fueled recession, the Federal Reserve indicated the economy is getting stronger.

In a statement Wednesday, the Federal Reserve said “indicators of economic activity and employment have continued to strengthen.”

“The sectors most adversely affected by the pandemic have shown improvement but have not fully recovered,” the Fed said. “Inflation has risen, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.”

As parts of the country face rising numbers of cases of the Delta variant, the Fed said the path of the economic recovery depends on the course of the virus.

The Fed continued to emphasize its goal of achieving maximum employment and 2% inflation over the long term.

“The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range 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,” the Fed said.

In addition, in December the Fed said it planned to increase its holdings of Treasury securities by at least $80 billion per month.

“These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses,” the Fed said.

Rising inflation

Much to consumers’ chagrin, inflation continues to rise.

Earlier this month, the Bureau of Labor Statistics (BLS) reported the Consumer Price Index (CPI) for All Urban Consumers rose by 0.9% in June. The CPI had jumped by 0.6% in May.

For those in the market for a new or used car, that remains a pricey proposition.

The BLS said the index for used cars surged by 10.5% in June. Meanwhile, the food index rose by 0.8%. The energy index jumped by 1.5%, while the gasoline index rose by 2.5%.

Furthermore, the Federal Reserve Bank of St. Louis reported the five-year forward inflation expectation rate reached 2.25% on Wednesday. The five-year rate fell to a nadir of 0.86% on March 19, 2020.

IMF warns against ‘premature tightening’ of central bank policy

On a global scale, the International Monetary Fund this week warned elevated inflation levels likely aren’t going away soon.

The rate of economic recoveries among nations has been principally divided along the lines of vaccine access, the IMF said in its recent World Economic Outlook report.

“Vaccine access has emerged as the principal fault line along which the global recovery splits into two blocs: those that can look forward to further normalization of activity later this year (almost all advanced economies) and those that will still face resurgent infections and rising COVID death tolls,” the report states. “The recovery, however, is not assured even in countries where infections are currently very low so long as the virus circulates elsewhere.”

The IMF forecast the global economy to grow by 6.0% in 2021 and by 4.9% in 2022. Meanwhile, the IMF predicted inflation levels to return to pre-pandemic levels in most countries in 2022.

The IMF also cautioned central banks to avoid premature tightening “until there is more clarity on underlying price dynamics.”

“Clear communication from central banks on the outlook for monetary policy will be key to shaping inflation expectations and safeguarding against premature tightening of financial conditions,” the IMF argued. “There is, however, a risk that transitory pressures could become more persistent and central banks may need to take preemptive action.”

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