Fed keeps rates close to zero during pandemic fallout

Committee offers even more downbeat assessment of economic outlook than in March

US Federal Reserve chairman Jerome Powell. The Federal Open Market Committee has pledged to take additional steps if needed. Photograph:  Eric Baradat/AFP via Getty Images

US Federal Reserve chairman Jerome Powell. The Federal Open Market Committee has pledged to take additional steps if needed. Photograph: Eric Baradat/AFP via Getty Images

 

The Federal Reserve kept its main interest rate close to zero on Wednesday, as officials weighed the impact of the heavy dose of liquidity and stimulus already delivered to the US economy in the last two months.

At the end of a two-day meeting on Wednesday, the Federal Open Market Committee (FOMC) stopped short of any big new monetary policy action or guidance, but pledged to take additional steps if needed.

“The Federal Reserve is committed to using its full range of tools to support the US economy in this challenging time, thereby promoting its maximum employment and price stability goals,” it said.

“The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world.”

The target range of the federal funds rate was maintained between 0 and 0.25 per cent, its level since March 15th, when Fed policymakers were forced to slash rates and boost asset purchases to shield the economy from the coronavirus pandemic.

In its statement, the FOMC said that it would keep rates close to zero “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals” – using the same language as in March.

Additional action

It also reiterated that the Fed would “use its tools and act as appropriate to support the economy”, highlighting that the US central bank was still poised for additional action if necessary.

The committee offered an even more downbeat assessment of the economic outlook than it did in March. “The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term,” it said.

The statement came after new data exposed the economic damage already inflicted by the Covid-19 outbreak on the US economy. Output contracted at an annualised rate of 4.8 per cent in the first quarter of the year, its worst performance since the Great Recession, and the slump is expected to be deeper in the second quarter after at least 26 million people were left newly unemployed.

Sharp expansion

The Fed has already stepped in with lower interest rates, a sharp expansion of its balance sheet, the establishment of dollar swap lines with foreign central banks, and the creation of lending facilities with the US treasury to offer credit to struggling businesses across the country. Trading conditions in critical debt markets have stabilised as a result, buoyed by the Fed’s commitment to expand its efforts as needed.

“The committee will closely monitor market conditions and is prepared to adjust its plans as appropriate,” the Fed added in its statement.

Jay Powell, the Fed chair, has previously said the US central bank is not considering a move towards negative interest rates, as some of its counterparts around the world have done.

However, the Fed still has scope to firm up its commitment to ultra-low rates for a long time, by setting specific targets based on unemployment and inflation levels for any increase. It also has room to expand its asset purchases and credit facilities. – Copyright The Financial Times Limited 2020