The U.S. Federal Reserve declared on March 17 that it would keep interest rates at 0.25 percent since the coronavirus pandemic continues to pose a major risk to the American economy. Following a two-day meeting of the Federal Open Market Committee, the decision was made. The 0.25 percent interest rate is in line with expert predictions, which foresee the rates to be maintained through 2023.
“As we have noted in the past, we think this messaging is consistent with our expectation for a tapering announcement around year-end,” Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said in a report. Seven out of 18 Fed authorities revealed that they expect the rates to be raised after next year, up from five officials last December.
Four officials expect a rate hike to happen in 2022. However, Chairman Jerome Powell has repeated that the Fed will never raise interest rates until the labor market is fully healed. He also promised to support the American economy for “as long as it takes.”
For employment, the U.S. job market shows a slight recovery, adding 379,000 jobs in February. The unemployment rate fell to 6.2 from January’s 6.3 percent. But 9.5 to 22 million jobs lost during the initial stages of the pandemic lockdowns have not yet returned.
The labor market recovery is also showing a disruption. According to data from the Labor Department’s Bureau of Labor Statistics, the number of Americans filing for unemployment benefits rose by 45,000 for the week ending March 13.
Regarding the GDP, the Fed believes that the economy is heading towards its most robust growth phase in almost four decades. Officials expect 6.5 percent GDP growth this year. It isn’t surprising that since COVID-19 infections are decreasing and the stimulus checks are being deposited, two factors will boost economic growth.
Over the next two years, Fed officials predict growth rates to remain well over the trend of 3.3 percent in 2022 and 2.2 percent the following year. Over the long-term, the potential growth rate could be 1.8 percent.
Some investors are concerned about the risk of inflation. Powell stated that the Fed has a plan to reflate the economy. However, he wants to see actual data on inflation.
“The fundamental change in our framework is that we’re not going to act preemptively based on forecasts for the most part, and we’re going to wait to see actual data… I think it will take people time to adjust to that and to adjust to that new practice, and the only way we can really build the credibility of that is by doing it,” Powell said at a news conference.
The Fed has projected inflation to rise to 2.4 percent this year. However, the rate is expected to slip to 2 percent in 2022, signaling that whatever inflationary pressures exist are only temporary.
Major financial institutions have increased expectations for the American economy, especially with the $1.9 trillion pandemic relief package. Europe’s largest bank HSBC Holdings raised the 2021 GDP projection by 1.5 percentage points to 5 percent, expecting a strong revival in consumer spending. For 2022, the growth rate has been raised from 2.5 to 3 percent.
Pimco, one of the most prominent fixed-income managers globally, predicts America’s GDP growth for 2021 at 7 percent, mainly due to the stimulus package. In a research note, the firm said that this is a level of growth not seen since the “great inflationary episode” of the 70s and 80s.