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Fed Maintains Interest Rates, Says Inflation Still 'Below 2%': What Investors Need To Know

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Fed Maintains Interest Rates, Says Inflation Still 'Below 2%': What Investors Need To Know

The Federal Reserve maintained its target fed funds rate range of between zero and 0.25% on Wednesday. The Fed also reassured investors that inflation levels are under control as the U.S. navigates the ongoing pandemic.

“Following a moderation in the pace of the recovery, indicators of economic activity and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak. Inflation continues to run below 2%,” the Fed said in a statement.

Related Link: How To Invest In The Market Responsibly When Everyone Else Is Gambling

The Fed also said it will continue its current pace of at least $120 billion on monthly asset purchases to help ensure a functioning financial market and help provide credit to households and businesses that need it.

The statement comes after the U.S. added 379,000 jobs in February, well above the 210,000 jobs economists were expecting.

All 11 members voted unanimously to maintain current rates.

2021 And Beyond: Chair Jerome Powell discussed the Fed’s new “average inflation targeting” policy in August 2020 in which it may keep interest rates near zero until inflation levels exceed its 2% inflation target.

On Wednesday, the Federal Reserve released new “dot plot” economic forecasts. Eleven Fed members see no change to interest rates through at least 2023. Three members forecast rates will rise by between 0.25% and 0.5% in 2022.

The bond market is now pricing in a 13.4% chance of a rate hike by the end of 2021, up from just 2.1% a month ago, according to CME Group.

Federal Reserve members are projecting a 2021 U.S. unemployment rate of 4.5%, down from 5% in December. The committee’s 2021 GDP growth trade projection improved significantly from 4.2% to 6.5%. The Fed’s 2022 GDP growth rate projection also ticked higher from 3.2% to 3.3%. The Fed is now projecting 2021 PCE inflation of 2.4%, up from previous estimates of 1.8%.

"The Fed is trying to walk a fine line between acknowledging higher economic growth and maintaining their view that they will leave short term rates close to zero for the next two years," Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, said in a statement. 

"To the extent that longer-term interest rates keep moving higher, that is going to fan the flames of the rotation into cyclical stocks and away from technology and other longer duration assets."

Markets React: The SPDR S&P 500 ETF Trust (NYSE: SPY) jumped following the Fed announcement and was trading higher by 0.2% on the day. The yield on 10-year U.S. Treasury bonds increased slightly on Wednesday to 1.659%, its highest level since January 2020.

 

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