Fed Holds Rates Steady in First Meeting of 2021 By Investing.com

By Yasin Ebrahim

The Federal Reserve left interest rates unchanged on Wednesday following the conclusion of its first meeting of the year. 

The Federal Open Market Committee kept its benchmark rate in a range of 0% to 0.25% and maintained its $120 billion monthly pace of bond purchases. 

“The path of the economy will depend significantly on the course of the virus, including progress on vaccinations. The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook,” The Fed said in its statement.

The unchanged rate decision comes as the near-term economic backdrop has weakened at a time when consumers appear to be battening down the hatches following a slowdown in the labor market recovery.

But this weakness will likely prove transitory as the pace of recovery is expected to gather momentum in second of half the year amid ongoing efforts to roll out vaccines and further support from fiscal stimulus.

Forecasts for a sharper recovery, led by pent-up consumer demand has stoked fears that the Fed could be forced to taper its $120 billion monthly pace of bond buying, or quantitative easing, sooner than expected to curb inflationary pressures.

Earlier this month, however, Fed Chairman Jerome Powell downplayed the risk of runaway inflation, indicating the post-pandemic inflation pick up will likely be a one-off.

“The real question is, how large is that effect [post-pandemic rise in prices] going to be and will it be persistent … clearly a one-time increase in prices is very unlikely to meet persistently high inflation,” Powell said during a virtual event sponsored by Princeton’s Bendheim Center for Finance on Jan. 15.

In its previous meeting in December, the FOMC signaled that it was no hurry to hike its benchmark rate anytime soon at least through 2023.

Market participants are expected to shift attention to Powell’s press conference at 2.30 p.m. ET, for more insight into the outlook on the economy and conditions that could warrant QE tapering in the future.  

During the press conference, Powell is likely to “reinforce the notion that any talk of tapering the Fed’s asset purchases is premature,” Daiwa Capital Markets.