Despite Economic Recovery And Rising Prices, U.S. Central Bank Keeps Interest Rates Near Zero
November 3, 2021—The Federal Reserve announced today it will begin reducing the amount of Treasury securities it purchases every month, in light of economic progress. However, in a move that mirrors the European Central Bank decision, the U.S. central bank is maintaining an accommodative stance on monetary policy, meaning it will continue to increase the money supply.
Specifically, the committee is keeping the Federal funds rate at 0 to 0.25 percent, which is slightly above Europe’s negative rates.
A key point is the Fed is no longer basing the decision on the U.S. unemployment rate, which is historically low. The measure of success for the central bank now includes the labor participation rate. That seems to be dangerously entering the territory of fiscal policy.
Some Tapering, Still Accommodative
It is scaling back its massive bond-buying program of $120 billion a month by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities. Furthermore, it will increase its holdings of Treasury securities later this month.
“The Federal Reserve’s ongoing purchases and holdings of securities will continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses,” the Fed committee said.
Stocks Rise, Rewarding Investors
Anticipating the decision based on news reports from earlier in the week, the U.S. financial markets rose. The S&P 500, Dow and Nasdaq rose to record levels for Wednesday’s session, continuing climbs they’ve been following all year. That allows investors to keep cashing in.
Policy of ‘Patience’
Meanwhile, consumer prices are also continuing to rise. In the United States, consumer inflation is at 5.4 percent for the year–significantly higher than the 2 percent target.
Noting rising prices in its statement released today, the committee said, “Inflation is elevated, largely reflecting factors that are expected to be transitory. Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors.”
Shifting Focus to Labor Participation Rate
Federal Reserve Chair Jerome Powell answered questions from reporters about the Fed’s slow response to rising prices. He justified the loose monetary policy. Moreover, he indicated it would continue.
“We don’t think it’s time to raise rates now,” Powell said.
Powell justified the Fed’s decision by saying the goal is “maximum employment.” What’s interesting is that U.S. economy faces a labor shortage, not a job shortage. Powell said he recognizes that.
A key to the story is the Fed is no longer basing the decision on the U.S. unemployment rate, which is historically low. The measure of success for the central bank now includes the labor participation rate. That seems to be dangerously entering the territory of fiscal policy.
Asked by a reporter for a definition of “maximum employment,” Powell indicated it’s loosely defined–perhaps not defined at all. “But at the end of the day, it’s a judgment thing,” he said.
That loose definition and the shifting of the marker allow the central bank to keep interest rates low. And, in turn, that allows fiscal policymakers in the White House and Congress to keep amassing debt. (The U.S. government, by the way, faces another test with its debt limit in December.)
Risking Higher Inflation
Notably, Powell acknowledged that the decision may spur higher inflation, saying “The risk is skewed toward higher inflation.”
Copyright secured by Digiprove © 2021 Patti Mohr