US Fed maintains status quo on interest rate, bond purchases

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US Fed maintains status quo on interest rate, bond purchases

 US Fed maintains status quo on interest rate, bond purchases
Image source: US Treasury Building in Washington DC on Pennsylvania Avenue. © Kuosumo | Megapixl.com

Summary

  • The US Federal Reserve maintains interest rate paid on reserve balance at 0.10%.
  • The Fed will continue buying bonds worth US$120 billion every month.
  • The US central bank has allayed fears of rising inflation in the economy.

The American central bank, the US Federal Reserve (Fed), on Wednesday, maintained the interest rates near zero as part of its easy monetary policy, despite anticipating economic acceleration and higher inflation.

The 11 members in the board of governors of Fed voted unanimously to maintain “interest rate paid on required and excess reserve balances at 0.10%”.

The apex bank also said that it will continue to buy US$120 billion worth of bonds each month – a move that will ensure surplus liquidity into the system. The bond purchase programme of the US Fed is aimed primarily at two things – to support an economy and to provide support to the market functioning. The move by Fed comes at a time when 30-year mortgages are still pegged close to 3%.

“The economy is beginning to move ahead with real momentum," Fed chairman Jerome Powell told reporters on Wednesday after the monetary policy meet. An episode of one-time surge in prices as the economy re-opens is not likely to lead to persistent higher inflation, he said trying to justify the stance of the Fed.

In March, the US had highest retail inflation in 30 months, as consumer prices rose by 2.6% -- hinting at the economic turnaround.

Despite the Fed’s dovish stance, Wall Street ended the day in red – the Dow 30 was down 48 basis points (bps), NASDAQ100 down 42 bps and S&P500 down 9 bps. Experts suggest that Mr Powell’s comments on financial stability, where he talked about bubble in the equity markets, led to this sell-off in the equities.

The Fed’s monetary policy comes a day before the US is set to release its first-quarter GDP figures. The experts, who are anticipating best annual economic growth in the US since 1984, expect the first-quarter growth numbers to be far higher than it was earlier anticipated – 6.5%.

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