KResearch projects that the Federal Reserve (Fed) will maintain its policy rate within the range of 0.0-0.25 percent at its meeting on April 27-28, 2021. While the US economy has shown signs of recovery following expedited vaccination efforts, with business activities able to return to normal amid the consistent release of stimulus packages, the labor market will likely need much more time to achieve full recovery per the Fed's target. Overall, more than 17.4 million people have applied for unemployment benefits. While the COVID-19 situation has somewhat eased in the US, the risk of new outbreaks remains. Many countries continue to experience new outbreaks as well as the emergence of newer COVID-19 variants. Taking into account the fragile labor market and existing risk factors, the Fed is expected to maintain quantitative easing (QE) measures to support the US economic recovery.
Regarding concerns over inflation, the Fed views the sudden spike in inflation as only a temporary factor, so it is inclined to focus more on economic recovery than inflationary pressures. Nonetheless, such heightened inflation will likely persist during the forthcoming period due to the low base of March-May 2020. In fact, a possible strong recovery in domestic demand coupled with pent-up demand after previously subdued spending could contribute to the US inflation rate exceeding the Fed's longer-term goal of 2 percent in 2Q21. However, inflation may be less than 2.0 percent during 2H21 if the effects of the low base and pent-up demand wear off. Therefore, the Fed still sees no need to tighten monetary policy to cool the overheated economic growth.
Since the US economy is seeing continuous improvement, the Fed faces a challenge in maintaining a loose monetary policy and may eventually have to withdraw such supports over the upcoming period. Nevertheless, KResearch believes that the Fed will maintain the same level of asset purchases and a near-zero policy rate until the end of 2021 at least. If the Fed were to begin to signal QE tapering, financial markets would be thrown into a state of intense volatility. While the United States may have brought the COVID-19 outbreak under control, and vaccinations appeared to be expedited, the risk of new outbreaks persists as shown in the new COVID-19 waves that are happening across many countries. Some countries have even encountered new variants of the coronavirus, which could render current vaccines unable to offer full protection to patients. For these reasons, the Fed is expected to maintain an accommodative monetary policy for the rest of the year, while monitoring potential scenarios for 2022 once every other factor has come into focus.
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