The federal reserve released the conclusion of their July 2021 meeting on the 28th of July. In this month’s note, we will be exploring their decision and its implications.

The federal reserve had its fifth FOMC meeting of the year to discuss monetary policy last week. The outcomes were neither unexpected nor extraordinary. Nevertheless, there are some takeaways.

Takeaways

The federal reserve maintained the status quo on interest rates and re-iterated the accommodative policy stance. The committee seeks to continue the support until the US economy reaches maximum employment (pre-pandemic levels) and a stable 2% inflation. It is important to note that the inflation target is medium-term. Temporary spikes in inflation are termed transitory. Though this may be true as economies face temporary shutdowns, we still do need to keep a watchful eye on how this pans out.

With the progress on vaccinations and policy support from the fed, there is a visible rebound in the US economy. The sectors most adversely affected by Covid still have a way to go. Asset purchase increase of $80 billion for Treasury securities and $40 billion for mortgage-backed securities will continue. The committee has kept all options open and will make necessary changes to the monetary policy based on developments.

A member of the Fed’s board of governors, Ms Lael Brainard, also remarked on rebuilding the post-pandemic economy. The points below are extracts from her paper

The second quarter saw demand increasing, resulting in real personal consumption expenditures growth of 11.8% and real GDP growth of 6.5%. By the end of the year, the US economy is expected to achieve an average annualized growth of 2.2%. Employment data for June shows that there is a shortfall of 6.8 million jobs relative to pre-pandemic levels. Recent high inflation numbers reflect supply-demand mismatches in a handful of sectors that are likely to prove transitory. Ms Lael Brainard expects many of the forces leading to outlier performance in certain avenues to dissipate next year, as the supply chain bottlenecks ease. She remarked that lumber prices have softened, used car prices seem to have peaked out and semiconductor production is likely to expand. Nevertheless, she went on to explain that the Fed would remain vigilant to any persistent inflation pressure signs or if expectations were moving above target. While the momentum is strong, downside risks are posed by the delta variant and low vaccination in certain areas.

The federal reserve is confident in the economic recovery. While employment is still not satisfactory, the central bank will keep pushing until the data satisfies them. The delta variant does pose a risk and cannot be ignored. Inflation will be a dilemma in the committee’s head as they wait to see if it indeed is transitory. Times ahead are shaping up to be very interesting for monetary policy. Keep a lookout for the RBI’s monetary policy statement in the first week of August. Follow our page for more interesting updates.

 

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