U.S. keeps ultra-low interest rate policies in place, but nods to 'strengthened' recovery

The U.S. Federal Reserve held interest rates and its monthly bond-buying program steady on Wednesday, nodding to the U.S. economy's growing strength but giving no sign it was ready to reduce its support for the recovery.

The Fed left its benchmark short-term rate near zero, where it's been since the pandemic erupted nearly a year ago, to help keep loan rates down to encourage borrowing and spending.

"Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened," the U.S. central bank said in a unanimous policy statement at the end of a two-day meeting.

Nevertheless, it said"the path of the economy will depend significantly on the course of the virus, including progress on vaccinations."

"The ongoing public health crisis continues to weigh on the economy and risks to the economic outlook remain."

'Tiptoeing' toward rate increases

The language about the virus reflected a slightly less negative view than the Fed's description in March, when it said the health crisis posed"considerable risks to the economic outlook."

Coupled with the strong language on the economy, analystssaid that suggested at least a small step by the Fed towards thebeginnings of a discussion about when to wean the U.S. economyfrom crisis-era programs.

"It is very much tiptoeing in the direction of a strongereconomic backdrop that could potentially justify tapering andeventual rate increases," said Steven Violin, portfolio managerfor F.L. Putnam Investment Management Company in Wellesley,Mass.

Despite the improving economy, the Fed on Wednesday repeated the guidance it has used since December, setting the list of conditions that must be met before it considers pulling back from the emergency support put in place to stem the economic fallout of the coronavirus pandemic in 2020.

That includes "substantial further progress" toward its inflation and employment goals before stepping back from its monthly bond purchases.

U.S. job growth has been accelerating and the Fed expects inflation to rise to its two per centtarget over time, eventually allowing it to trim its $120 billion US in monthly bond purchases and raise its target overnight interest rate from the current level near zero.

But even that first step of tapering bond purchases is likely months down the road, and the Fed gave no indication in Wednesday's statement that there is any rush.

"It is not time yet" to begin discussing any change in policy, Fed chair Jerome Powell said in a news briefing after
the release of the statement, repeating his assessment that theeconomy was still a long way from a return to full employment.

Canada has taken similar stance

Canada tooka similar path last week,keepingits benchmark interest rate steady at a record-low 0.25 per cent. However, the Bank of Canada did say improving conditions meant it would ease off federal government bond purchases, which are part of its quantitative-easing program designed to aid the economy.

WATCH | Bank of Canada optimistic about post-pandemic recovery:

Bank of Canada optimistic about post-pandemic recovery

3 years ago

Duration 2:07

The Bank of Canada is predicting the country will see quick economic growth after the current wave of COVID-19 and is reducing how much government debt it buys each week.

The U.S. economy remains more than eightmillion jobs short of where it was before the pandemic forced whole industries to shut down in an effort to control the spread of the coronavirus.

The U.S. economy has been showing unexpected strength in recent weeks, with barometers of hiring, spending and manufacturing all surging. Most economists say they detect the early stages of what could be a robust and sustained recovery, with coronavirus case counts declining, vaccinations rising and Americans spending their stimulus-boosted savings.

Risk of wage-price spiral

In March, employers added nearly onemillion jobs an unheard-of figure before the pandemic. And in April, consumer confidence jumped to its highest level since the pandemic flattened the economy in March of last year.

The quickening pace of growth, on top of additional large spending packages proposed by U.S. President Joe Biden, have raised fears among some analysts that inflation, long quiescent, could rise uncomfortably fast.

Once expectations for inflation do rise, they can be self-fulfilling.Workers start demanding higher pay to offsetexpected price gains, and retailers begin raising prices to offset increased wages and supply costs. This can set off a wage-price spiral, something the United States last experienced in the late 1960s and 1970s.