Fed leaves benchmark rate unchanged amid inflation concerns

Washington, Jun 16 (EFE).- The United States Federal Reserve on Wednesday left its benchmark interest rate unchanged at a target range of between zero and 0.25 percent at the conclusion of a two-day meeting, which took place amid growing concerns about inflation.

New US growth projections also were released in conjunction with the meeting of the Federal Open Market Committee, the bank’s policy-making body, with the median 2021 forecast by participants climbing to 7 percent, up from 6.5 percent in March.

That level of economic expansion would be the highest since the 1980s.

“Progress on vaccinations has reduced the spread of Covid-19 in the United States. Amid this progress and strong policy support, indicators of economic activity and employment have strengthened,” the FOMC said in a press release.

With respect to inflation – a major concern in financial markets after the US consumer price index moved up 5 percent in May from a year earlier – the meeting participants acknowledged the growing price pressure by raising their median 2021 inflation forecast to 3.4 percent, up from 2.4 percent in March.

Fed Chair Jerome Powell, however, sought to dampen those concerns on Wednesday, saying in a press conference that the recent price hikes are due to specific, temporary factors and noting that he and his central bank colleagues expect that inflation will move back down next year and remain around the Fed’s target level of 2 percent in 2023.

Even so, he acknowledged that price volatility is certainly possible as the country recovers from the coronavirus crisis.

“As the reopening continues, shifts in demand can be large and rapid and bottlenecks, hiring difficulties and other constraints could continue to limit how quickly supply can adjust, raising the possibility that inflation could turn out to be higher and more persistent than we expect,” Powell said.

The central bank reiterated that it will continue to buy around $120 billion in bonds each month to provide additional support for the US recovery.

Participants, however, “expect continued progress ahead toward (the) objective” of “substantial further progress,” Powell said. “And assuming that is the case, it will be appropriate to consider announcing a plan for reducing our asset purchases at a future meeting.”

With respect to the federal-funds rate, which is the rate banks charge each other for short-term borrowing, the Fed’s new so-called “dot plot” indicated that central bank officials are leaning toward two hikes of that benchmark rate by the end of 2023.

Powell, however, said in his press conference that those projected hikes, which would be the first since 2018, should be “taken with a big, big grain of salt.”

“These are, of course, individual projections. They’re not a committee forecast. They’re not a plan. And we did not actually have a discussion of whether liftoff is appropriate at any particular year because discussing liftoff now would be highly premature. It wouldn’t make any sense,” the Fed chairman said.

In terms of unemployment, the central bank’s projected 2021 jobless rate of 4.5 percent was unchanged from its March forecast.

Although the US unemployment rate fell by three-tenths of a percentage point in May to 5.8 percent, marking the first time it has fallen below 6 percent since the start of the pandemic, the rate of job creation has been lower than expected.

“The recovery is incomplete and risks to the economic outlook remain. As with overall economic activity, conditions in the labor market have continued to improve, although the pace of improvement has been uneven,” Powell said.

The next meeting of the FOMC is scheduled for July 27-28. EFE

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