The Fed confirms its stimulus while insisting on “temporary” spikes in inflation

The US central bank underlines “progress in vaccination and strong political support” to sustain the recovery.

The US Federal Reserve (Fed) maintains the script . So much so that it barely alters it in a few words from its monetary policy statement last month. The institution chaired by Jerome Powell confirms the need to maintain “accommodative” financial conditions despite eventual spikes in inflation , which it attributes “largely to transitory factors . 

Although the consumer price index  jumped from 1.7% to 2.6%  in the third month of the year, the Fed insists that “the current public health crisis continues to weigh on the economy and the risks to economic prospects “. In this sense, it points directly to ” progress in vaccines” , which in recent weeks has been exposed to several setbacks .

After reiterating his commitment to “use his full range of tools to support the US economy,” the main changes from his previous statement come in the second paragraph. This is where the central bank recognizes that, “amid advances in vaccination and strong political support, indicators of economic activity and employment have strengthened .”

However, despite the nod to the reconstruction plans announced by the Biden administration with the allusion to “political support”, the Fed reiterates that “the sectors most affected by the pandemic remain weak.” Of course, this time he points out that “they have improved”.

Thus, the institution chaired by Jerome Powell has chosen to keep its current stimulus program active . In this way, purchases for up to 120,000 million dollars a month in the debt markets will continue . An amount that will continue to be distributed between 80,000 million a month to issues of the US Treasury and another 40,000 million in mortgage bonds.

In the same way, the first swords of the Fed have chosen to  keep interest rates at historical lows  within the range between 0% and 0.25% to which they were  lowered by surprise in March of last year . In this sense, it should be remembered that the map of points known last month marked a clear path of possible increases in official rates until 2023 .

In this context, it should be borne in mind that the Fed altered the basis of its mandate last summer by introducing the  concept of “average inflation . ” A turnaround that he presented taking advantage  of the Jackson Hole symposium and that left the door open to tolerate CPI rates temporarily above the key 2% mark without the need to correct them.

This is the capacity for maneuver that the Fed has resorted to today with its decision to hold its arsenal unchanged despite the latest inflation data, which it has once again downplayed.

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