Fed will buy bonds until it sees significant economic progress
The Federal Reserve on Wednesday promised to continue channeling cash to financial markets until the US economy recovers. It looks like a promise of long-term relief, amid misplaced hopes for immediate steps to tackle the recent pandemic-related recession..
Following a meeting on monetary policy that looked at both short-term risks to the economy and new prospects for a coronavirus vaccine, Fed Chair Jerome Powell acknowledged that the U.S. central bank’s toolbox is not well suited to meet the most pressing needs of households and businesses.
«The weak parts of the economy are the service industries that are closely related, such as restaurants and the tourism industry», – Powell said at a press conference after a two-day political meeting.
«It is not financial conditions that hold them back, but rather the spread of the virus, which is now intensifying across the country.», – he explained.
Unemployed households or stranded businesses are more in need of immediate cash, Powell added, as leading congressional lawmakers have been working on as they negotiate a new $ 900 billion bailout bill..
For the Fed, the more relevant horizon is the middle of next year, Powell said. By this point, the central bank hopes the country can move closer to universal immunity from coronavirus and see a surge in economic activity..
«The problem is in the next four, five, six months, ”Powell told reporters. – You should think that sometime in the middle of next year you will see how people feel comfortable going out and doing a wider range of activities».
Vaccine introduction has raised hopes for the economy to emerge from the recession that began in March and sparked talk of a second Great Depression.
In quarterly forecasts, released alongside the policy statement, Fed officials have raised their forecasts for the economy’s performance this year and in 2021..
Currently, there is only a 2.4% decline in GDP in 2020 – compared to June forecasts of 6.5%. Growth is forecast to average 4.2% next year, up from the 4% projected in September. Fed also lowered expected unemployment rate for 2021 to 5% from 5.5%.
Given that interest rates are likely to remain at zero in the coming years, the Fed has added a clearer promise to continue the current bond buying program until there is «significant further progress» in restoring full employment and achieving the inflation target of 2%.
«Between these two pillars for the economy, our current political position is appropriate», – Powell said, adding that the Fed will consider changing the bond buying process if economic conditions change.
The vote on the policy statement was unanimous, with the first clear link between the Fed’s monthly purchases of US Treasury bonds and government-backed securities with a range of economic conditions. Previously, the central bank promised to make these purchases only «in the coming months», no clear indication of when the recession program might end.
«We expected, possibly, an extension of the asset purchase dates. They didn’t do it, – said Katie Bostjancic, chief US financial economist at Oxford Economics. – But this forward-looking quantitative easing guideline is pretty powerful … it gives some clarity, which is good».
US equities ended the session mostly higher, with the Nasdaq closing at an all-time high. Treasury Yield Curve Increased Slightly While Dollar Gained Against Major Trading Partner Currencies.
The latest Fed policy meeting in 2020 ended a tumultuous year as the central bank cut interest rates, increased bond purchases and other emergency measures to stem the economic disaster caused by the coronavirus pandemic..
However, Fed officials in recent months have called on the federal government to step in to provide additional assistance in the wake of the pandemic to support economic recovery at a time when the spread of COVID-19 infections has led to more lockdowns and restrictions on businesses across the country..
U.S. retail sales fell more-than-expected on Wednesday, the Commerce Department said, adding to signs of a slowdown in economic recovery..
More than 304,000 US people have died from COVID-19 since the pandemic began.
Legislators in Congress on Wednesday «approached» to the $ 900 billion COVID-19 relief bill, which will include $ 600-700 incentive checks and extended unemployment benefits. If there is no additional help from Washington, millions of unemployed Americans should have lost their unemployment benefits the day after Christmas..
Powell told reporters that despite some progress in economic recovery and lower unemployment rates, the pace of improvement is slowing and the proportion of people who work or are looking for work remains below pre-pandemic levels..
«While significant progress has been made in the labor market since spring, we will not lose sight of the millions of Americans who are out of work.», – he said.
How the Fed’s bond buying will impact corporations