Federal Reserve Acknowledges Higher Inflation, But Maintains Bond Purchases, Keeps Rates Near Zero

The Federal Reserve remained committed to its current monetary policy initiatives, despite recognizing an acceleration in the country’s economic recovery, and subsequent inflation expectations.

As was widely anticipated, the Fed has decided to leave the key interest rate near zero, while maintaining bond purchases to at least $120 billion per month. The central bank officials’ latest decision to not make changes to its approach comes amid a strengthening economy, and rising price pressures.

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

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Despite a number of figures showing continued improvement in America’s economy, Fed Chairman Jerome Powell said the recovery still remains “uneven and far from complete.” Although he noted that inflation pressures will likely continue to mount over the next several months, he once again reassured that any sort of inflation will only be temporary. “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,” the FOMC committee reiterated.

Inflation has been steadily rising, with March consumer prices jumping 2.6%— marking the fastest year-over-year increase since August 2018. In the meantime, a number of household goods-producing companies have announced they will be raising prices on a number of consumer products, amid increasing input costs. Similarly, the ISM manufacturing PMI index registered at 85.6%, as all 18 industries noted higher prices for raw materials. In other words, prices are skyrocketing for the things consumers are actually buying.

Albeit, with a number of pressing signs suggesting inflation is here and will likely stay, the central bank reiterated its commitment to keep the benchmark rate at 0.25%, noting it will even allow inflation to exceed the 2% target until full employment is achieved. The Fed also repeated it would not change the pace of its bond purchases, which currently sits at $120 billion worth of bonds each month.

Following the news, 10-year Treasury yields jumped to the highest for the day, before paring back gains. The US dollar meanwhile fell to its low of the day.

Information for this briefing was found via the FOMC. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.