Fed to keep buying bonds, avoid rate hike
The Federal Reserve says it will keep buying bonds to maintain low borrowing rates and support the U.S. economy in the midst of a recession. And it says nearly all the Fed’s policymakers foresee no rate hike through 2022.
The Fed has cut its benchmark short-term rate to near zero. Keeping its rate ultra-low for more than two more years could make it easier for consumers and businesses to borrow and spend enough to sustain an economy depressed by business shutdowns and high unemployment.
The central bank noted in a statement after its policy meeting ended Wednesday that the viral outbreak has caused a sharp fall in economic activity and surge in job losses.
Fed officials estimate that the economy will shrink 6.5% this year, in line with other forecasts, before expanding 5% in 2021. It foresees sees the unemployment rate at 9.3%, near the peak of the last recession, by the end of this year. The rate is now 13.3%.
At a virtual news conference Wednesday afternoon, Chairman Jerome Powell is drove home the message that the economy remains in need of extraordinary help despite recent glimmers of a possible recovery, including a government report Friday that employers surprisingly added jobs in May.
Since March, the Fed has slashed its benchmark short-term rate, bought $2.1 trillion in Treasury and mortgage bonds to inject cash into markets and rolled out nine lending programs to try to keep credit flowing smoothly. Most analysts expect the Fed to pause and assess the economic
landscape before embarking on any further actions, which could come at September’s meeting.
The Fed’s actions are credited with having helped fuel an extraordinary rally in the stock market, which has nearly regained its pre-pandemic high after a dizzying plunge in March.
And by committing to buy corporate bonds,
thereby reinvigorating the market for such securities, the Fed has also ensured that corporations can continue to borrow. Its initiatives also include a first-ever program through which the Fed is buying state and local government debt to support the municipal bond market.
Many economists say those steps have prevented the downturn from worsening. This week, the National Bureau of Economic Research, the official arbiter of recessions, declared that the U.S. economy entered a recession in February.
One challenge for the Fed now is to shift its focus from the emergency actions it took in March and April to try to carry the economy through a shutdown, to what steps it will take to stimulate a recovery as businesses increasingly reopen.
In remarks last month, Fed Vice Chair Richard Clarida indicated that Fed officials want to see a few more months of data to gauge the economy’s health before determining their next steps.
For now, Fed officials likely feel little pressure
to act further because few investors expect them to make any changes to their benchmark rate anytime soon. Though the Fed could technically cut rates into negative territory, Powell has largely rejected negative rates as an option.
The Fed has bought $2.2 trillion in bonds since March, when financial markets locked up as investors rushed to unload Treasurys and other securities in exchange for cash. The markets are now largely functioning. and the Fed’s purchases have slowed.