Vaccines may keep the coronavirus pandemic under control this year, but the Federal Reserve is nowhere near the end of its ultra-loose monetary policy, Chicago Fed President Evans said Monday.
To achieve our goals and manage risk, the Fed’s policy stance will have to remain accommodative for quite some time,” Evans said. As we work to achieve our dual objectives, economic actors should be prepared for a period of very low interest rates and balance sheet expansion.”
Markets interpreted Evans’ speech as meaning that the Fed will not tighten monetary policy as it has in previous economic cycles, which could be key to achieving healthier levels of inflation and a stronger job market.
The Fed adopted a new policy framework last year, setting an average inflation target of 2%. Inflation has been below 2 percent for years due to long-term factors such as an aging population, slow growth and the shock of a pandemic-induced recession.
Evans said Monday that targeting inflation at 2.5 percent would be an “important” part of the Fed’s efforts to achieve its inflation target in a timely manner.
“It may take several years for average inflation to rise to 2 percent, which means that monetary policy will remain accommodative for a long time,” Evans said, “which means that policy rates will remain low for a long time and suggests that the Fed may continue its current asset purchase program for some time. “
In addition to Evans, Cleveland Fed President Mester said today that she expects the U.S. economy to rebound in the second half of 2021, but not enough to justify the Fed reducing its bond purchases until 2022.
The economic outlook for the second half of this year looks much more promising thanks to vaccinations,” Mester said. However, my own forecast is that the Fed will not make substantial progress toward either goal by the end of 2021.”
She said, “If things go in the direction I expect them to go, I hope we can reduce the size of our asset purchases next year, but to reiterate, that still depends on the economy.”
When it comes to inflation, Mester said, “If inflation goes to 2.5%, will I be frustrated? Probably not. It depends on the situation.”
Mester said her expectations are related to whether most Americans will be able to get their new crown vaccine in the third quarter. If vaccinations are slower, the economy will recover more slowly.
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