The Strategist

Fed notices decline in US business activity, keeps the rate unchanged


01/28/2021 - 02:37



The US Federal Open Market Committee refrained from changing the rate at the end of its first meeting of the year. The last time the rate was changed was in March 2020, when it was urgently cut to 0-0.25%.



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Recall that the rate forecasts updated in December did not suggest an increase until at least the end of 2023. In a statement on Wednesday, the regulator separately noted that the pace of recovery in economic activity and employment has slowed in recent months. These indicators are weakest in the sectors most affected by the pandemic.

The volume of asset purchases was also unchanged at the meeting: it will remain at least $120bn per month ($80bn per month in government bonds and $40bn in mortgage-backed securities).

The purchases will continue until there is "substantial progress towards the goals of maximum employment and price stability". The asset purchases are helping to improve financial market functioning, the Fed said in a release.

The regulator did not revise its macro forecast this time around. Previously, the US economy was estimated to contract by 2.4% in 2020 with growth of 4.2% in 2021 (3.2% in 2022).

According to data for the third quarter, US GDP grew by 7.4% year-on-year after a decline of 9.1% in the second quarter (there was a 0.3% increase in the first quarter).

The International Monetary Fund recently predicted an acceleration of the US economy to 5.1% this year - with the world economy expected to grow by 5.5% in 2021 after a 3.5% decline in the previous year.

The inflation target of the Fed was 1.1% in November compared to 1.2% in October (1.4% after energy and food excluded). Unemployment remained at 6.7%, but the number of new jobs in December decreased by 140 thousand (growth of 70 thousand was expected). Retail sales continued to fall in December against the background of the second wave of the pandemic (minus 1.4% vs. minus 1.3% in November). Industrial production grew by 1.6%, exceeding analysts' forecasts, including a 0.9% rise in industrial output (but still 3.2% lower than a year ago).

source: capitaleconomics.com




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