Banking and Finance Law Daily Economic activity and employment continue to strengthen; ‘funds’ rate unchanged
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Wednesday, July 28, 2021

Economic activity and employment continue to strengthen; ‘funds’ rate unchanged

By Thomas G. Wolfe, J.D.

"The sectors most adversely affected by the pandemic have shown improvement but have not fully recovered."

Based on financial developments in connection with the COVID-19 pandemic and on economic information it has received since it last met in mid-June, the Federal Open Market Committee decided unanimously to maintain the target range for the federal funds rate at the current zero- to 0.25-percent level. According to the FOMC, given the "progress on vaccinations and strong policy support," indicators of economic activity and employment "have continued to strengthen." Meanwhile, the sectors most adversely affected by the pandemic "have shown improvement but have not fully recovered." In addition, inflation has risen, "largely reflecting transitory factors," the Committee reported.

Given the economic challenges associated with the coronavirus pandemic, the Federal Reserve is "committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals," the FOMC communicated.

Asset purchases. Since the beginning of 2021, the FOMC has indicated that the Fed would continue to increase its holdings of Treasury securities "by at least $80 billion per month" and of agency mortgage backed securities "by at least $40 billion per month until substantial further progress has been made" toward the Committee’s maximum employment and price stability goals. Observing that the economy "has made progress toward these goals," the FOMC stated that it will continue to assess this progress "in coming meetings" and noted that these asset purchases "help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses." Separately, the Fed released a statement on the repurchase agreement arrangements.

U.S. economic outlook. The FOMC reiterated that the path of the U.S. economy "continues to depend on the course of the virus." While progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, "risks to the economic outlook remain." At the same time, overall financial conditions "remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses."

The FOMC stated that while it still seeks to "achieve maximum employment and inflation at the rate of 2 percent over the longer run," the Committee "will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent." In evaluating future monetary policy, the Committee "would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals." This assessment will take into account "a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments."

Funds rate; discount rate. In deciding to keep the target range for the federal funds rate at the current zero- to 0.25-percent level, the FOMC expects that "it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time."

In connection with the primary credit "discount" rate, the interest rate charged for short-term credit extensions to depository institutions, the Federal Reserve Board voted unanimously to maintain the primary credit rate at its existing level of 0.25 percent. More than a year ago, the Fed slashed the discount rate by 1.50 percentage points to its current 0.25-percent level (which took effect March 16, 2020).

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