The Federal Reserve predicted much stronger growth and a lower unemployment rate this year and recommitted to holding interest rates steady, an aggressive stance that will accompany historic spending on pandemic relief and an additional spending package that is expected to be even larger.
Following a two-day meeting in Washington, Fed officials projected that unemployment would fall to 4.5% by the end of the year and that real gross domestic product would rise to 6.5%, a large increase from the 4.2% previously projected in December’s policy statement.
“Following a moderation in the pace of the recovery, indicators of economic activity and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak. Inflation continues to run below 2 percent,” the Fed said.
Still, officials indicated in projections released alongside the statement that they don’t expect to raise short-term interest rates from near zero in the next three years. In other words, they are planning to maintain rates near zero even as the economy enjoys strong growth and low unemployment, anticipating that too-high inflation will not be a problem.
Prior to the meeting, Treasury yields hit a 13-month high, with 10-year Treasury yields vaulting to 1.67% in the lead-up to the policy announcement and remarks by Chairman Jerome Powell.
The Federal Reserve’s announcement coincided with the release of billions of dollars in stimulus funds hitting the accounts of customers with the biggest banks in the United States on Wednesday. The checks are part of a weighty $1.9 trillion spending package that President Biden and Democrats punched through Congress with the intent of providing economic relief to those suffering the ill economic effects of the COVID-19 pandemic.
The Fed has kept interest rates at near-zero rates since the start of the pandemic, and Powell has said that he and officials intend to keep it that way until sustained inflation reaches 2% and U.S. employment rates have peaked. Fed officials have said they expect inflation to breach the 2% level this year but also that they wouldn’t immediately raise interest rates until they are sure there is a permanence to that level. Fed officials have also brushed off warnings by prominent economists that too-high inflation is a present threat.
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Powell said in an interview earlier this month that “a couple of quarters, or even more than that, of prices being above 2%” would still be insufficient to change thinking about inflation expectations.
Powell’s announcement comes on the heels of a better-than-expected February jobs report that found the economy added 379,000 jobs. Economic forecasters had predicted fewer than 200,000 new jobs.
Expectations are that the economy will continue its growth as more people receive COVID-19 vaccinations and begin increased retail spending after the third and latest round of stimulus cash, which began at $1,400 per person making less than $75,000. Retail sales increased 7.6% in January after people began receiving their second stimulus checks but declined 3% in February.
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The Biden administration also has plans this year for a massive infrastructure spending package that is expected to eclipse the $1.9 trillion COVID-19 relief package in size. The enormous spending bill is also set to be coupled with historic tax hikes that could represent the largest increases in nearly three decades.
