Updated Jul 28, 2021 - Economy

Fed acknowledges economic progress, maintains supportive policy

Jerome Powell

Jerome Powell. Photo: Al Drago/Bloomberg via Getty Images

The Federal Reserve said Wednesday that the economy has made progress, but reiterated its commitment to keep monetary policy loose and stimulative.

Why it matters: The rapid economic recovery has caused the prices for some goods and services to jump, causing measures like the core PCE price index to rise above the Fed’s target for an average of 2%.

The big picture: Employment in America remains 6.7 million jobs below pre-pandemic levels, and so the economy still has a long way to go before it can be seen as having made "substantial further progress" as defined by the Fed.

State of play: The Fed is keeping interest rates low, leaving its benchmark short-term rate at 0% to 0.25%.

  • In its ongoing efforts to keep financial conditions easy, the Fed is continuing its monthly purchases $80 billion worth of Treasury securities and $40 billion worth of mortgage-backed securities.

What they’re saying: "The sectors most adversely affected by the pandemic have shown improvement but have not fully recovered," the Fed said in a statement. "Inflation has risen, largely reflecting transitory factors."

  • The central bank noted that when it launched its monthly purchases of $120 billion worth of assets in December, it said the program would be in place until the economy made "substantial further progress."
  • "Since then, the economy has made progress toward these goals, and the Committee will continue to assess progress in coming meetings."

Between the lines: The Fed is telling the market that it recognizes the economy has been improving. But even still, there's further to go before it'll start tapering its asset purchases.

  • "I’d say we have some ground to cover on the labor market side," Federal Reserve chair Jerome Powell said during a press conference.

What to watch: The Fed’s next major update is likely to come on Aug. 26 to 28 when central bankers and economists meet in Jackson Hole, Wyoming for the Kansas City Fed’s Economic Policy Symposium.

The bottom line: Despite the current bout of inflation, the Fed will continue to keep monetary policy loose as long as unemployment remains as high as it is.

Editor’s note: This story was updated to add comments from Fed chair Jerome Powell.

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