US Fed leaves key rates unchanged
BOND PURCHASES HELD AT $120 BN A MONTH
WASHINGTON: US Federal Reserve chair Jerome Powell opened the door to a possible shift in the central bank’s bond purchases in coming months, saying that more fiscal and monetary support are needed as rising Covid-19 infections cloud the outlook for the economic recovery.
“At this meeting my colleagues and I discussed our asset purchases,” Powell told reporters Thursday after the Fed kept interest rates near zero and held bond purchases at a $120 billion monthly pace.
With the Fed’s overnight policy rate near zero, it has sought to support the economy during the pandemic by buying bonds. Those purchases help to lower longer term borrowing costs for businesses and households. Powell said that the central bank could shift the composition, duration, size or the life cycle of the programme to provide more support.
“We understand the ways in which we can adjust the parameters of it to deliver more accommodation if it turns out to be appropriate,” he said.
The Fed’s next meeting is December 15-16, when it could possibly make a change if the economic picture deteriorates.
“They began to discuss the future of the asset purchase programme but came to no conclusions yet,” said Stephen Stanley chief economist at Amherst Pierpont Securities. “That leaves the door open for something new, either in terms of changing the pace or composition of asset buys or of introducing new forward guidance on the topic, in future meetings.”
Powell spoke about the outlook for the economy against the backdrop of the U.S. election, whose results remain uncertain. He deflected questions on the outcome, saying: “It is a good time to step back and let the institutions of democracy do their jobs.”
While Democrat Joe Biden has a clearer path to the presidency than Donald Trump, Republicans look on track to retain control of the Senate. That could dim the prospect for another round of massive fiscal aid—leaving the Fed in the spotlight.
“The Fed is being forced once again to shoulder more than its fair share of the burden of stimulus,” said Diane Swonk, chief economist at Grant Thornton in Chicago. “Powell was optimistic that fiscal stimulus was possible. It seems clear it will now be less and occur later than needed.”
Divided government in Washington would reduce the chances for a big fiscal stimulus package from Congress in the new year, even as the Covid-19 pandemic continues to threaten the economy.
Powell sounded a bit hopeful on the prospects for more aid from lawmakers, noting “plenty of people on Capitol Hill” see the need for more action, while cautioning that the recovery will be stronger with more fiscal support. He was also wary on the outlook: “The recent rise in new Covid-19 cases, both here in the United States and abroad, is particularly concerning.”
In a statement following its two-day meeting, the Federal Open Market Committee largely repeated language on the economy they’ve employed since July, noting that “economic activity and employment have continued to recover but remain well below their levels at the beginning of the year.”
The vote to keep rates and asset purchases unchanged was unanimous. Minneapolis Fed President Neel Kashkari, a voter this year, did not attend the meeting following the birth of a child. San Francisco Fed President Mary Daly voted as an alternate.
Ten-year Treasury yields were little changed following Powell’s remarks, hovering at about 0.76%. The yield curve, as measured by the gap between 5- and 30-year yields, also held steady at about 121 basis points.