Economic data say the Federal Reserve has reason to continue to be patient when it considers its economic support in the week ahead.
That patience may be tested in unexpected ways, though.
Meeting one of the central bank’s two goals — maximum employment — remains distant. Total unemployment in December was almost 12 percent. This includes 4 million Americans who have gone more than six months without working. And more Americans filed for first-time unemployment benefits the first week of January than since August.
The agency also has runway ahead of it in meeting its second goal — stable prices. That means low inflation. And for the Fed, low inflation is 2% over the long-term. Inflation has been persistently below that target. So much so, the bank made the historic decision in August to tolerate inflation higher than 2% “for some time.”
The Fed has two big tools to achieve these goals: its target short-term interest rate and its own appetite to buy bonds. The Fed’s rate is at zero and will remain there. The Fed has been buying $120 million combined of government and mortgage-backed bonds each month.
Meantime, market interest rates have been trending higher as demand for bonds has eased slightly. And more supply will be coming to market thanks to the pandemic-induced government spending that will continue. That imbalance may force the Fed to boost its own bond buying rather than tapering its strategy in the months ahead.
Instead of signaling to the market its patience in reducing its economic support (by cutting back its bond buying or raising its short-term interest rate), the Fed instead may have to reassure investors it will be impatient if real borrowing costs jump as the economy wavers.