Shopping for bonds till financial system hits full employment

The Federal Reserve on Wednesday radically adjusted its efforts to support the economy while improving its growth prospects.

As expected, the Fed kept key rates close to zero after its two-day meeting.

Investors watched if the Fed would come up with results-oriented guidance setting out the conditions for policy reversal.

The Fed said it would continue to buy at least $ 120 billion worth of bonds each month “until significant further progress is made in meeting the committee’s maximum employment and price stability targets,” the statement said after the meeting.

“These asset purchases help promote the smooth functioning of the market and favorable financial conditions, thereby helping the flow of credit to households and businesses,” added the Federal Open Market Committee in a statement that was unanimously adopted.

However, the committee did not say it would extend the duration of these purchases.

The Fed had already committed not to hike rates until inflation exceeded its 2% target, even if unemployment fell to levels that normally signaled price pressures. The change in language related to asset purchases underscores the central bank’s commitment to managing the recovery from its coronavirus-era slump.

“Together, these measures will ensure that monetary policy continues to provide strong support for the economy until the recovery is complete,” Fed Chairman Jerome Powell said at his post-meeting press conference.

The markets had been looking for possible improvements the FOMC would make to its asset purchase program. Since the beginning of the coronavirus pandemic, the central bank has mainly bought bonds with shorter maturities to keep financial markets functioning.

At recent meetings, officials discussed the benefits of extending the maturity of the bonds to give the economy a stronger boost, similar to what happened after the 2008 financial crisis.

Extending the term helps lower longer-term interest rates, lower borrowing costs, and drive the return-hungry investors into riskier assets like stocks.

Powell stressed that the Fed has a “results-oriented” policy.

That said, if progress towards these outcomes slows, the Fed could step up its asset purchases, bringing its balance sheet to $ 7.3 trillion. The Fed will also commit to anchoring rates near zero for an extended period of time, he said.

Changes in economic outlook

In addition to changing the language surrounding the bond buying program, Fed officials have improved their outlook for the economy since the last forecast in September.

The mean expectation for gross domestic product in 2020 is now 2.4%, compared to the negative 3.7% in September. The outlook for 2021 is now 4.2% compared to 4% previously and 3.2% in 2022 compared to 3%.

The outlook from there has been reduced only slightly to 2.4% from 2.5% in 2023 and 1.8% from 1.9% in the long term.

The committee also offered a far more optimistic outlook on unemployment. A year-end rate of 6.7% is now forecast for 2020, compared to 7.6% in September. In 2021, the mean projection is 5% from 5.5%, while the two following years are 4.2% (previously 4.6%) and 3.7% (4%).

Officials continue to assume they will not hit the Fed’s inflation target of 2% by 2023, although in 2020 and the next two years the outlook rose 0.1 percentage points to 1.4%, 1.8% and 1, respectively .9% has risen.

The language elsewhere in the statement showed basically no change from the November meeting.

The Fed still sees a recovery in economic activity, but “well below” pre-pandemic levels. Overall, the Committee believes that the pandemic “will continue economic activity, employment and the
and inflation in the short term and poses significant risks to economic outlook over the medium term. “

Fed officials have urged Congress for more fiscal stimulus, which could come under a bipartisan bill that would provide an additional $ 900 billion to help displaced people, businesses under lockdown pressure, and general national efforts Treatment and vaccination of the virus could provide.

The Fed had joined the Treasury Department to provide incentives but recently learned that several loan programs it had deployed would end in late 2020. Buying bonds and keeping interest rates low remain the Fed’s main weapons in getting the economy back to normal.

With the Fed pledging to keep policies accommodative until the economic recovery closes, Powell pledged to ensure that markets are informed in good time before changes are made.

“If we see ourselves well on our way to achieving that goal, we will say so early in advance that we would actually consider slowing down the pace of all purchases,” said Powell.

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