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Fed’s Williams says better outlook is not enough to affect monetary policy

By Jonnelle Marte

(Reuters) – The U.S. economy is poised to grow at the fastest rate in decades this year as it recovers from the crisis caused by the coronavirus pandemic, but financial conditions are nowhere near the level at which the The Federal Reserve would consider withdrawing its support, the New York Fed chief said Monday.

The country’s Gross Domestic Product could expand about 7% this year after adjusting for inflation, representing the fastest growth since the early 1980s, said John Williams. But that boom may not be enough to achieve the Fed’s dual mandate for inflation and maximum full employment, he added.

“It is clear that there is a big change in the economy and the picture has improved,” Williams said during a virtual event. “But let me emphasize that the data and conditions that we are seeing now are not enough for the FOMC (the panel that sets the rates) to change its monetary policy stance.”

Fed officials agreed last week to keep interest rates near zero and continue to buy $ 120 billion a month in bonds until there is “further substantial progress” toward the Fed’s targets of maximum employment and a rate of inflation. Of 2%.

The labor market is still short of about 8.5 million jobs compared to pre-pandemic levels, and the loss of those jobs fell most heavily among service sector employees and black workers. Hispanics, he stated.

“This means that we will need large employment figures for some time to get the country fully functional again,” Williams said.

Although inflation may accelerate in the short term as prices recover from the low levels of last spring, it is likely to decline again to around 2% next year, Williams said.

He told reporters that the central bank has the tools it needs to control short-term interest rates, which are falling. The “number one goal” is to keep the federal funds rate within the Fed’s target range of 0% to 0.25%, he said.

The effective federal funds rate fell at the end of April and reached 0.05% on Friday. Finance firms are also pumping more cash into the New York Fed’s reverse line, which the central bank uses to set a floor on short-term rates by giving firms a place to temporarily hold their cash.

Williams said the Fed could respond if necessary by increasing the rate it pays on the reverse reversal line or by increasing the interest rate it pays to banks for excess reserves, known as IOER. Those adjustments would not be seen as a change in monetary policy, he added.

(Report by Jonnelle Marte, Edited in Spanish by Manuel Farías)

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