FOMC Sets Goals for Economic Recovery at 2021 Conference

On March 16 - 17, 2021, the Federal Open Market Committee (FOMC) held its annual conference to discuss monetary policymaking for the coming year. 

As of today, the COVID-19 pandemic continues to impact businesses and individuals, hurting the economy. It’s been one year since COVID restrictions were first implemented and thousands of businesses in the United States were put permanently out of business, leaving millions of Americans without jobs. 

 

Vaccine rollout is in effect, and it's possible that the pandemic will be largely behind us in a matter of months. However, many reparations need to be done. 

The Federal Reserve Board agrees that Americans are still in dire need of assistance, and our economy needs revival. Their plan for economic recovery contains the following.

 

Achieve Maximum Employment and Inflation Rate of 2% 

Over the past year, inflation has been consistently running below 2% due to the economic harm caused by social distancing requirements, and this trend continues to persist. The goal of the Committee is to make up for the loss by achieving inflation slightly above 2% for a period of time, causing the average inflation rate to shift closer to an even 2%. 

In order to achieve this goal, the Committee will execute monetary policy with an "accommodative stance," which means they will cut rates to redirect money into the economy. 

 

Keep the Target Range for Federal Funds rate at 0 - 0.25% 

The FOMC determines the federal funds rate, which is the target interest rate for banks lending and borrowing excess reserves from other banks. The rate of 0 - 0.25% - which the committee agreed to continue into 2021 – was established in 2020 shortly after the outbreak of COVID-19. 

Lowering interest rates is a strategy to stimulate economic growth. When the federal funds rate is lower, banks have more freedom to lower interest rates for their customers, which gives Americans more buying power. Thus, the federal funds rate was lowered last year, and it will maintain a consistent rate until economic recovery is evident. 

Continue to Increase Holdings of Treasury Securities

 

The Committee also agreed to "increase its holdings of Treasury securities by at least $80 per month and of agency mortgage-backed securities by at least $40 billion per month" until substantial economic progress is made. Increasing holdings in securities allows the government to borrow money without taxing the public. 

Turning to Treasury and agency mortgage-backed securities during this time is a way to alleviate the tax burden on Americans who are struggling financially. This will allow American families to spend money at local businesses and take out loans from banks, directing money back into the economy.

Additionally, while unemployment rates are high and up to $10,200 in unemployment insurance per individual will remain untaxed by the federal government, the Committee must prepare for alternatives to taxation.

Monitor Risks

With vaccine rollout underway and these policy changes in place, it's possible that economic recovery is underway. That being said, risks and unexpected changes are always a factor, and policy must be altered accordingly when events like these occur. 

"The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals," the press release states. 

The Federal Reserve will continue to monitor public health, employment rates, inflation trends and geopolitical developments and make necessary changes to monetary policy.

"We understand that our actions affect communities, families, and businesses across the country. Everything we do is in service to our public mission. We are committed to using our full range of tools to support the economy and to help assure that the recovery from this difficult period will be as robust as possible," stated Fed Chair Jerome Powell in his opening remarks. 

These policy decisions are aimed at restoring the U.S. economy, lowering unemployment rates and empowering Americans once again.