Fed says US economy depends on pandemic and vaccinations

Federal Reserve keeps rates unchanged in first meeting under Biden administration

The Federal Reserve Building in Washington, January 27, 2021. AFP

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

"The ongoing public health crisis continues to weigh on economic activity," the Fed's policy-setting Federal Open Market Committee 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 committee said it would keep the benchmark lending rate low until inflation rose to 2 per cent and the economy achieved "full employment".

As the world's largest economy struggles with the worst coronavirus outbreak, inflation has fallen far below the central bank's 2 per cent target, while unemployment surged off record lows to 6.7 per cent.

This prompted the central bank to shift its focus to helping the labour market recover, while accepting higher inflation when the economy begins to grow more strongly.

The Fed's statement was little changed from its December meeting, although the reference to vaccines alludes to rising hopes that inoculations 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 committee 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".

The chief economist at the Mortgage Bankers Association, Mike Fratantoni. said there were questions about the Fed's plan should the economy experience a big rebound later in the year.

"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," Mr Fratantoni said.

The Fed did announce the rollback of one tool it 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," it said.