US Fed policymakers gently telegraphed that they are prepared to consider withdrawing some monetary support should economic conditions warrant it.
Policymakers at the United States Federal Reserve voted unanimously to leave interest rates unchanged at the end of their two-day meeting on Wednesday. The Fed will also continue to support the nation’s economic recovery by buying bonds at a clip of $120bn a month.
The continuation of monetary policy status quo came as no surprise, given that the Fed has long signalled it will keep its benchmark rate near zero until the US labour market is fully healed from last year’s COVID-19 blow. But Fed officials did signal they would be prepared to reconsider current monetary policy should risks to the economic recovery emerge.
The Fed noted that strong policy support along with progress on coronavirus vaccinations has continued to propel improvements in the nation’s economy and jobs market. The big question, though, is when the Fed will become concerned enough about rising inflation to start dialing back these easy-money policies.
Inflation is currently running above the Fed’s long-term target rate of 2 percent.
The Producer Price Index (PPI), which measures prices that businesses fetch for the goods and services they sell, increased 1.0 percent in June, after rising 0.8 percent in May, the US Department of Labor said.
Over the past 12 months, US producer prices rose 7.3 percent – the steepest advance since annual numbers were first crunched back in November 2010. Consumer prices rose 5.4 percent in June – the largest annual increase since August 2008.
A little bit of inflation is a good thing for an economy because it incentivises consumers to buy goods and services now, rather than sit on their wallets in expectation of prices dropping. But too much inflation is decidedly bad, especially if it triggers a vicious upward price spiral that prompts monetary policymakers to hike interest rates suddenly and potentially derail the nation’s economic recovery from COVID-19.
But policymakers are of the view that the uptick in inflation is a consequence of the economy reopening and will therefore prove temporary.
“Inflation has risen, largely reflecting transitory factors,” said Fed officials.
There were no hawkish statements from the Fed that it’s getting ready to take the training wheels off of the economic recovery any time soon. But policymakers gently telegraphed that they are prepared to consider withdrawing some monetary support should conditions warrant it.
“The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals,” said the Fed.