WASHINGTON—Federal Reserve officials are wrapping up a two-day policy meeting Wednesday at which they are likely to maintain ultralow interest rates to support the economy’s accelerating recovery.
The central bankers have noted in public comments the recent pickups in hiring, spending and inflation, but have signaled no readiness to consider changing the Fed’s key policies.
The Fed has held overnight interest rates near zero since March 2020, when the Covid-19 pandemic and related restrictions delivered a severe blow to the economy. Since June, the central bank has also been purchasing at least $80 billion of Treasury bonds and at least $40 billion of mortgage-backed securities to hold down longer-term borrowing costs for consumers and businesses.
Fed officials have said they would hold rates steady until the labor market is back to full strength and inflation has reached the central bank’s goal of averaging 2%. Chairman Jerome Powell has said those conditions are unlikely to materialize this year, and most Fed officials indicated last month that they expect to hold off on raising rates until 2024 at the earliest.
They also say they want to see the economy make “substantial further progress” toward their goals of maximum employment and 2% average inflation before starting to reduce the pace of bond purchases. Mr. Powell clarified recently that officials are measuring the economy’s evolution since December, when the Fed first issued that guidance.
More on the Economy
The economy has picked up steam in recent months as vaccination rates have risen, business restrictions have eased and the latest round of federal stimulus money has fueled spending. Consumer confidence rose in April to the highest level in 14 months, the Conference Board said Tuesday.
Economists surveyed by The Wall Street Journal expect hiring and inflation data to remain strong in the months ahead as the vaccination campaign advances, pushing economic growth to its fastest pace since 1983.
Fed officials have stressed that they want to see progress show up in economic data, rather than in forecasts, before they raise rates or scale back the bond purchases.
“We’re just in the beginning stages of seeing these good data,” San Francisco Fed President Mary Daly told reporters on April 16. “We’re going to need repeated months of this before we can distinguish optimism about the future from the realization of the future.”
As more evidence of a speedy economic recovery emerges, officials will likely begin outlining when and how they expect to ratchet down the Fed’s bond purchases. Mr. Powell has said he wants to give plenty of advance warning ahead of such a shift.
His challenge will be to communicate the pivot while minimizing disruptions to financial markets.
The last time the Fed signaled a reduction in asset purchases, in 2013, it sparked a bond-market selloff known as the “taper tantrum.” An ensuing spike in Treasury yields jolted Fed officials who worried they might undermine the economy’s recovery from the 2007-09 recession.
In contrast to that time period, the economy is now widely expected to recover faster. Yields on U.S. government bonds and certain derivatives suggest investors believe the Fed will be able to start raising rates by 2023, sooner than most central-bank officials have indicated.
Write to Paul Kiernan at [email protected]
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