Jerome Powell’s press conference and the Fed’s plans for the future of the American economy

On Wednesday, March 17 the Federal Reserve Bank updated its projections and policies for the American economy in the coming years. The Federal Reserve Bank (referred to as the Fed) is a branch of the US federal government responsible for managing the American economy. It does this by controlling interest rates and “printing” currency by adding bonds to its balance sheet that it then lends to banks. The rate at which it lends these bonds to banks affects the rates at which banks give loans to the public. This rate called the Fed funds rate. This means that if the Fed has a low rate, banks will be able to give more loans at a lower rate which stimulates the economy. The current chairman of the Fed, Jerome Powell, held a press conference Wednesday regarding the Fed’s plans for the American economy in the coming years. 

During the press conference Powell claimed, “Following the pace of the recovery that began towards the end of last year, indicators of economic activity and employment have turned up recently”. He attributed this to the good fiscal policy during the pandemic and a quicker than expected economic recovery. Indicators show that the housing sector has more than fully recovered from pandemic lows and that business investment and manufacturing production are on the rise once again. Powell acknowledges that the sectors worse hit by the pandemic, such as cruises, airlines, leisure facilities, oil and gas drilling, auto parts and equipment, and restaurants, are still struggling and may take more time to fully recover. Employment has risen an unexpected amount since the worst of the pandemic. The Fed views maximum employment as one of its central goals. Unfortunately, participation in the labor market still remains notably below pre-pandemic levels and may take more time to recover. The Fed’s forecasts for economic growth this year have been revised upwards a notable amount since the December summary of economic actions. This is due to successful vaccination campaigns and expectedly swift recovery from the pandemic.

The Fed has an annual inflation goal of 2%. Powell stated: “overall inflation remains below our 2% long-run objective.” Therefore, the Fed will aim to have an inflation rate just above 2% in the coming years. It is unknown how the stimulus packages passed by congress will affect inflation. If consumer spending quickly rebounds, upward pressure on prices will occur due to a lower supply of goods and a rebounding labor market. The Fed believes that its ability to meet employment and economic goals strongly depends on its ability to meet its 2% annual inflation goal. The Fed plans to increase the holding of Treasury securities by 80 billion USD per month and will increase the holding of agency mortgage-backed securities by at least 40 billion USD per month. This means that the Fed intends to “print” 120 billion dollars a month for the coming months.

During the pandemic, the Fed slashed interest rates to very low levels in an attempt to create a forgiving economic environment. During Wednesday’s press release Powell announced that the Fed will “maintain the 0-0.25% target range for the federal funds rate until the labor market rebounds and until inflation reaches 2%”. Interest rates this low highly incentivize economic activity and will allow the public to take out more loans and therefore spend more. As the dot-plot above illustrates, the Fed predicts that interest rates will stay this low through 2023 and doesn’t outline the exact moment when it plans to re-raise them. In the long term, the Fed wishes to have an interest rate between 2% and 3%.

In conclusion, the Fed seeks to assist in the recovery of the Coronavirus pandemic by keeping interest rates low and creating a safe economic environment for investment and employment. Many economists praised Powell for his good fiscal policy and concrete plan for recovery. Critics claim that it is unsafe to keep interest rates so low for such a long time and that the Fed is artificially inflating the American economy. Essentially, the Fed plans on making it really cheap for businesses to borrow money while they have lower turnover (due to the pandemic) and will raise rates as businesses reach higher turnover after the economy fully recovers. It is difficult to gauge the effects of this type of economic policy because its effects are felt so far in the future. Hopefully, in a couple years the American economy fully recovers and the Fed is able to control any inflation so the United States can continue to thrive.