The Federal Reserve kept its foot to the floor Wednesday in terms of the help it is providing for an economy that central bank officials say has slowed down.
Consistent with market expectations, the policymaking Federal Open Market Committee said it was keeping its benchmark short-term borrowing rate anchored near zero and maintaining an asset purchasing program that is seeing the Fed buy at least $120 billion a month.
At the core of the move to keep policy historically accommodative was an economy in which the sectors most vulnerable to the pandemic are taking the hardest hit.
“The pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic,” the committee’s post-meeting statement said.
The statement reiterated that Covid-19 is “causing tremendous human and economic hardship
across the United States and around the world.”
The committee otherwise left the statement unchanged.
The decision means that the fed funds rate, which serves as a benchmark for a variety of consumer debt instruments, will remain anchored in a range between 0% and 0.25% and most recently was trading at 0.08%.
Markets were watching, though, to see whether the statement would provide any clues on the future of the asset purchases, or quantitative easing. Since the beginning of the coronavirus crisis, the Fed expanded its holdings by more than $3 trillion, bringing its balance sheet to nearly $7.5 trillion.
Though inflation remains low now, investors worry that the Fed could start to taper the purchases unexpectedly should conditions change and cause market tumult. The statement offered no new guidance on the matter, so market participants will look for Chairman Jerome Powell’s post-meeting news conference for further details.
Fed officials remain cautious on an economy that has seen a two-speed recovery, with earners in upper-income brackets doing well and those at the bottom, particularly workers in services industries, faring poorly. That disparity has formed much of the impetus behind the Fed’s flexible average inflation targeting regime.
Under the approach, the Fed no longer will raise rates in anticipation of inflation but rather will tolerate higher levels in the interest of a more inclusive recovery. In the past, when the jobless rate would fall to levels consistent with what appeared to be full employment, the Fed would institute preventive hikes to stop inflation in its tracks.
The current economy is showing conflicting signs of inflation, with housing and materials costs pushing higher and services inflation lower.
From a macro view, the economy grew strongly in the fourth quarter overall, though activity slowed into the end of the year. The Commerce Department releases Q4 GDP on Thursday, with expectations, according to economists surveyed by Dow Jones, of a 4.3% increase. On Friday, the Fed’s preferred inflation gauge, the personal consumption expenditures deflator, is expected to show a year over year core increase of 1.3%.
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