Fed says US economy depends on pandemic, vaccinations

Heather SCOTT
·2-min read
The Federal Reserve said the fate of the US economy depends on how the coronavirus pandemic evolves

The Federal Reserve said Wednesday that the fate of the US economy depends on the course of the pandemic and the vaccine rollout, and pledged to keep interest rates low until employment recovers.

"The ongoing public health crisis continues to weigh on economic activity," the Fed's policy-setting Federal Open Market Committee (FOMC) said after its first meeting of 2021.

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

It was the first meeting under the presidency of Joe Biden, who took office last week with defeating the Covid-19 pandemic and pushing through a $1.9 trillion economic rescue plan as his top priorities.

The FOMC said it would keep the benchmark lending rate low until inflation rises to two percent, and the economy achieves "full employment," in keeping with the Fed's new policy stance.

As the world's largest economy grapples with the world's worst coronavirus outbreak, inflation has fallen far below the central bank's two percent target, while unemployment surged off record lows to 6.7 percent.

That prompted the central bank to shift its focus to helping the labor market to recover, while accepting higher inflation for a while once the economy begins to grow more strongly.

- Vaccine hope, hiccups -

The Fed's statement was little changed from its December meeting although the policymakers' reference to vaccines alludes to the rising hopes that the shots will allow economic activity to return to normal, despite distribution difficulties.

"The pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic," the statement said.

The Fed also committed to keeping up the pace of asset purchases of at least $120 billion a month to "help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses."

Mortgage Bankers Association Chief Economist Mike Fratantoni said there are some questions about the Fed's plan should the economy see a big rebound later in the year.

He said "market participants remain uncertain regarding how to interpret the Fed's asset purchase intentions -- and are wary of another quick move in rates -- should the economy rebound strongly in the second half of this year."

The Fed did announce the rollback of one tool it had used to ensure markets had sufficient liquidity.

"In light of the sustained smooth functioning of short-term US dollar funding markets," the New York Fed "will no longer offer regularly-scheduled one-month term repo operations," the central bank announced.