Fed Keeps Rates on Hold Despite Signs of Improving Economic Recovery

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Fed Keeps Rates on Hold Despite Signs of Improving Economic Recovery

By Yasin Ebrahim

Investing.com – The Federal Reserve left rates unchanged Wednesday, and expressed a willingness to maintain the lower for longer monetary policy path even as the economic recovery and inflation gather momentum.

The Federal Open Market Committee left its benchmark rate unchanged in the range of 0% to 0.25% and maintained its monthly pace of bond buying at $120 billion.

"Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened," The Fed said. "Inflation has risen, largely reflecting transitory factors."

Ahead of the decision, there weren't many betting on any surprise on the policy front from the Fed.

Earlier this month, Fed Chairman Jerome Powell said it is "highly unlikely" the central bank would hike rates before 2022.

The Fed chief reiterated that there was still a ways to go until the economy met the three-part test needed to achieve a lift off in rates. That three part test included maximum employment, inflation reaching 2%, and on track to run moderately above 2% for some time.

Still, market participants remain wary of an unexpected shift in the Fed's policy. Incoming economic data continue to point to a robust recovery as inflation steps up pace.

The 10-year inflation "breakevens,” a key measure of inflation expectations over the next decade, topped 2.4% on Tuesday, the highest level since April 2013. The PCE index, the Fed's preferred inflation measures, was at 1.6% for February.

The central bank, however, continues to believe any post-reopening boom in inflation would be short-lived, or transitory.

Powell is expected to field questions on the path of monetary policy and the economic outlook at a press conference slated for 14:30 ET (18:30 GMT).

"We also expect the usual script from Fed Chair Jerome Powell speaking of his cautious optimism on the recovery in the press conference while downplaying any talk of meaningful medium-term inflation pressures," ING said in a note.

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