US Fed upgrades view of economy while keeping rates near zero

Committee members say pandemic-fuelled financial risks have lessened as economy strengthens but remain cautious

Federal Reserve officials strengthened their assessment of the economy on Wednesday and signalled that risks have diminished, while leaving their key interest rate near zero and maintaining a $120 billion monthly pace of asset purchases.

“Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened,” the Federal Open Market Committee said in a statement following the conclusion of its two-day policy meeting. “The sectors most adversely affected by the pandemic remain weak but have shown improvement. Inflation has risen, largely reflecting transitory factors.”

Marking a clear improvement since the pandemic took hold more than a year ago, the Fed said that “risks to the economic outlook remain”, softening previous language that referred to the virus posing “considerable risks".

The statement also noted that sectors hit hardest by the Covid-19 pandemic had “shown improvement".

Ten-year treasury yields rose to a high of the day before paring back, while inflation expectations over the decade held near their highest since April 2013. The dollar moved towards its lows of the day and the S&P 500 moved higher.

Fed Chair Jerome Powell and his colleagues met amid growing optimism for the US recovery, helped by widening vaccinations and aggressive monetary and fiscal support.

President Joe Biden will unveil a sweeping $1.8 trillion plan to expand educational opportunities and childcare when he addresses a joint session of Congress later on Wednesday, while highlighting his $2.25tn infrastructure proposal and the $1.9tn  pandemic relief package he signed into law last month.

At the same time, a rise in coronavirus cases in some regions around the world is casting a shadow over global growth prospects, giving policymakers reason to remain patient on withdrawing support. Fed officials have also been largely dismissive of inflation risks for the time being, saying a jump in consumer prices last month was distorted by a pandemic-related decline in prices in March 2020.

Wednesday’s committee decision was unanimous.

Mr Powell told a post-meeting press conference that the recovery has been faster than expected but “it remains uneven and far from complete” and the economy “is a long way from our goals".

US central bankers repeated they would not change the pace of bond buying until “substantial further progress” is made on their employment and inflation goals. The target range of the benchmark federal funds rate was kept at zero to 0.25 per cent, where it’s been since March 2020.

Mr Powell said that it was not yet time to discuss scaling back asset purchases and “it will take some time before we see substantial further progress".

Forecasters surveyed by Bloomberg expect the US economy this year to expand at the fastest pace in more than three decades, with the Fed expected to announce in late 2021 that it will start slowing the pace of asset purchases.

US central bankers have backed expansive fiscal policy, noting that millions of Americans are still unemployed and run the risk of remaining jobless for the long-term if they don’t find work soon.

Since their March meeting, officials have seen the S&P 500 stock index continue to rally while yields on the government 10-year note, after a sharp move up in the first quarter, have traded in a range around 1.6 per cent. The labour market in March added the most jobs in seven months as improvements across most industries boosted non-farm payrolls by 916,000.

Officials have also said policy changes will be based on outcomes, not a forecast, meaning a string of powerful monthly labour market gains would be needed to merit “substantial further progress".