Daily Management Review

US Fed keeps the rate unchanged, indicates a step closer to employment and inflation targets


The US Federal Reserve (Fed) decided at the end of its July meeting to keep its key rate at 0-0.25% per annum. The watchdog also refrained from any changes to asset purchases, but noted the ongoing economic recovery and progress towards employment and inflation targets and in comments on this topic.

The US Federal Open Market Committee refrained from changing the policy rate at the end of its July meeting (which was urgently reduced to 0-0.25% in March 2020). Recall that the dot plot with rate forecasts, which is updated every two months, was adjusted in June - it assumes two rate hikes in 2023.

The volume of asset purchases has also remained unchanged at a minimum of $120bn a month ($80bn a month in government bonds and $40bn in mortgage-backed securities). The purchases will continue until "substantial progress towards the goals of maximum employment and price stability", the release said. However, the regulator has now pointed out that since last December's stated intention to maintain the asset purchases, the economy has shown progress towards employment and inflation targets and the committee will continue to assess the proximity of key targets at upcoming meetings - this could be a very mild hint at the time when the programme will start to drawdown.

In its assessment of the economy, the Fed also pointed out that indicators of economic activity and employment have continued to improve and the sectors most affected by the pandemic are recovering, but the process is not yet complete. The wording that "inflation has risen due mainly to temporary factors" was retained.

Recall that the Fed expects that prices will rise by 3.4% this year (3% excluding food and energy), but that growth will slow to 2.1% in 2022. Meanwhile, consumer inflation (CPI), which the regulator is targeting, rose to 3.9% in May, excluding food and energy, to 3.4%, up from 3.6% (3.1%) a month earlier. However, the 'broader' PCE index (which includes rural and non-commercial sector prices) jumped in June to 5.4% (up 0.9% month-on-month), excluding food and energy to 4.5% (in May it was 5% and 3.8% respectively).

source: cnn.org