“The Fed Will Need to Make Verbal Announcement Regarding Its Change of Course at the End of the Year”

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ZEW Economist Friedrich Heinemann on the Fed’s Interest Rate Decision

Despite the upswing in the US labour market, the US Federal Reserve has decided to keep its benchmark rate unchanged in a range of 0.0 and 0.25 per cent and not to slow down its asset purchases. Professor Friedrich Heinemann, head of the ZEW Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, comments on this matter:

“While the US labour market has seen a surprisingly positive development in the past few weeks thanks to its rapid successful vaccine roll-out, it is still far from full employment due to the challenges brought about by the pandemic. For the time being, there is no reason for the Fed to phase out its asset purchasing programme. In the coming months, however, Fed Chairman Jerome Powell will certainly have to adjust his communication strategy.  The US central bank will have to react to the Biden administration’s fiscal policy by tapering the monthly purchase volumes by the end of the year at the latest; and it should make a verbal announcement in the near future so as to prepare financial markets for this change of course. In the long run, this combination of an extremely loose monetary policy and a highly expansionary fiscal policy is an explosive cocktail that could cause the US economy to overheat. The Fed cannot afford to take these risks for price and financial stability.”