The Federal Reserve on Wednesday held monetary policy steady while noting that the sectors of the economy that have already been damaged by the coronavirus pandemic are experiencing another round of pain.
“The pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic,” the Fed’s interest-rate committee said in a statement.
Fed Chairman Jerome Powell has stressed repeatedly it is premature for the U.S. central bank to contemplate exiting its accommodative monetary policy stance.
The Fed has cut its policy interest rate close to zero and is buying $120 billion per month of U.S. Treasurys and mortgage-backed securities to help the economy recover from the pandemic.
The central bank is trying to convince the markets that it won’t reverse course until the economy has recovered. First, the central bank adopted a policy framework spelling out that it won’t raise interst rates at the first whiff of inflation.
And at its last meeting in December, the Fed said it would maintain the purchases until “substantial further progress” is made on its twin goals of low unemployment and stable 2% inflation. Fed watchers think this means the Fed won’t begin to slow asset purchases until 2022 and raise rates until perhaps a year later.
Some regional Fed presidents have suggested a tapering could start this year if the economy improved.
“Low inflation is giving the FOMC plenty of room to stay accommodative,” said Mike Feroli, chief U.S. economist at JP Morgan Chase before the meeting.
At the moment, economists think the economy will be weak in the near-term but expect a surge in growth as the winter ends and more Americans receive COVID vaccinations.
They also expect the economy to get a boost from President Joe Biden’s proposed $1.9 billion economic relief package although analysts expect it will be smaller before it can pass Congress.
Fed officials recognize that there are potential financial stability risks in this low-interest-rate environment.
Cleveland Fed President Loretta Mester told reporters earlier this month that she didn’t see “risks underlying the financial system right now as being excessive in any sense.” She added that she would continue to monitor the sector.