In a unanimous vote, the Federal Reserveâs rate-setting body kept its target interest rate in the 0% to 0.25% range at its April meeting, citing the âtremendous human and economic hardship across the United States and around the worldâ that the COVID-19 pandemic is causing.
This means credit card interest rates, which are typically tied to the target Fed funds rate, are likely to continue at current levels for a while.
The economic situation is improving with help from the vaccination rollouts and the Fedâs monetary policy support. The job market has improved, and although the service sector industries most impacted by the pandemic remain weak, they are improving, too. The Fed stated that though inflation is on the upswing, this effect is âtransitory,â or will be short-lived.
Whatâs next for the economy will depend âsignificantly on the course of the virus, including progress on vaccinations,â with risks to the outlook remaining. The Fed will also continue with its ongoing bond monthly purchases of $80 billion in Treasury securities and $40 billion in agency mortgage-backed securities until âsubstantial progressâ is made toward the central bankâs goals.
With the Fed aiming for maximum employment as well as for inflation to run moderately above 2% for a while (so that it averages 2% in the long-term, considering that it has been undershooting this target for a while), it will continue with its accommodative stance until these goals are in sight, based on data.
See related: Credit cards keeping COVID-hit consumers afloat
Fed anticipates inflation uptick will be short-lived
In a related press conference, Fed Chair Jerome Powell noted that economic indicators have strengthened since the beginning of the year. The housing sector is doing well, business investment has picked up and spending at bars andÂ restaurants has also improved. He expects that continued vaccinations should allow for a âreturn to normalâ later this year.
He anticipates that as the economic reopening proceeds, there will be an upward pressure on prices. However, âthese will be transitory effects,â and the Fed will maintain its accommodative stance since such a temporary hike in inflation will not meet its standard for inflation.
âThe economy is a long way from our goals,â Powell advised, with the path of the virus having an impact on the Fedâs ability to achieve its goals, which also include maximum employment.
He doesnât expect inflation to move up in a persistent manner, and to influence expectations for inflation, while there is still âsubstantial slackâ in the economy.
As to what makes the Fed think that the inflation effect will be transitory this time, and different from previous periods in the past that fueled high inflation, Powell noted that the worldwide pandemic is an unprecedented event. In the current situation, there is a âbase effectâ considering an upward movement in prices from very low year-ago readings.
Also, there is a âbottleneck effectâ with the supply chain for certain goods facing a mismatch in supply and demand. He expects this to be resolved as businesses adapt. While he is more confident that the base effects will disappear in a few months, itâs harder to say how the bottleneck effects will play out. The Fed will be prepared to use its tools if inflation were to move materially above 2% in a persistent way, contrary to expectations.
See related: Fed reports card balances rose by $8 billion in February
Substitution of technology could impact some jobsÂ
On the employment front, Powell noted that the economy has not experienced the level of scarring from people being out of work for a long time that the Fed was concerned about a year ago. Even then, itâs going to be a different economy with service industries looking to use more technology, which will make it difficult for some workers to get back in the labor force. This means the Fed still has labor market concerns.
Thereâs also a tension in the labor market between the high unemployment rate and firms not being able to find workers. Some factors behind this disconnect include people who are staying home to take care of children since schools have not reopened; workers who donât have the right skills or who are not located in the right geographical places; fears of COVID; and people who have retired from the labor force, and a lack of clarity about their re-entering it. Another factor influencing the labor situation is unemployment insurance, which will run out in September.
See related: Millennials defer debt payoff, tap savings in pandemic
Housing market stable
Powell is not concerned about the housing market, which the Fed carefully monitors. Households were in good shape before the pandemic, and lenders are not engaged in the sort of lax no-doc or low-docÂ lending that prevailed during the 2000s housing bubble.
Thus, the Fed is not concerned about housing market stability or unsustainable prices. And while the stock market is a bit âfrothy,â this has to do more with the economic reopening than with the Fedâs accommodative policy.
About Chinaâs introduction of a government digital currency and whether the Fed will come out with its own soon, Powell noted, âWe feel an obligation to understand the technology and all of the policy issues very well.â
The U.S. dollar is the worldâs âreserve currencyâ and he is not concerned about China taking the lead with digital currency. The U.S leadership has come about as a result of its good laws and democratic institutions, so itâs âmore important to get it right than to do it first.â