Federal Reserve officials predicted they would keep interest rates close to zero until at least the end of 2022, as the US central bank indicated it would take years to bring joblessness back down to the levels before the coronavirus pandemic.
The dovish tone from the Fed, which is expecting the US economy to contract by 6.5 per cent this year, with unemployment falling to 9.3 per cent, reinforced expectations that the central bank was settling in for an extended fight against the economic shock triggered by the virus.
In a policy statement that was mostly unchanged compared with April, the Federal Open Market Committee said it was “committed to using its full range of tools to support the US economy in this challenging time” and would keep interest rates close to zero until it was “confident that the economy has weathered recent events”.
During the ensuing press conference, Jay Powell, the Fed chair, added: “We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates.”
The Fed’s economic projections were its first since last December before the coronavirus spread. After this year’s blow to output and employment, the median forecast of Fed officials was for a rebound in 2021 — with growth of 5 per cent and joblessness dropping to 6.5 per cent.
All but two Fed officials predicted its main interest rate would remain close to zero through 2022. The median forecast for core personal consumption expenditures inflation, the Fed’s preferred measure, was 1 per cent this year, 1.5 per cent in 2021 and 1.7 per cent in 2022 — below the central bank’s 2 per cent target.
Mark Cabana, an interest rate strategist at Bank of America, said the economic projections suggested “a Fed that is going to be quite dovish”.
“This Fed is very much on hold for the foreseeable future and wants to do what it can to provide additional stimulus and help the economy,” he said.
$20bn Approximate value of Treasuries the Federal Reserve is currently buying a week
Since early March, the US central bank has delivered a series of extraordinary policy moves to calm investors and protect the economy. In addition to slashing its main interest rate, the Fed has sharply expanded its balance sheet with open-ended asset purchases and set up emergency lending facilities for businesses and local authorities.
The Fed’s steps — which exceeded in both scale and speed the measures adopted during the financial crisis — contributed to a rapid recovery in US equity markets, which have since regained all of the ground lost since the start of the year.
The S&P 500 turned positive immediately after the Fed’s announcement, but reversed course during Mr Powell’s news conference. It closed down 0.5 per cent. Treasuries rallied, retracing some of the declines in recent weeks, when the yield on the benchmark 10-year note hit its highest level since March. Yields fall as prices rise.
Mr Powell pushed back against concerns the Fed had artificially propped up markets in a way that could be a source of financial trouble ahead. He said the financial stress at the outset of the pandemic risked amplifying “the negative effects on what was clearly going to be a major economic shock” and the central bank needed to “restore the market to function”.
“We’re not looking to achieve a particular level of any asset prices, what we want is investors to be pricing in risk like markets are supposed to do,” he said.
The market rebound has given Fed policymakers some breathing room to consider their next steps, including whether to set up a defined programme of asset purchases, or issue more precise guidance on the conditions that would lead to tighter monetary policy.
On Wednesday, the Fed said it would increase its holdings of government debt “at least at the current pace to sustain smooth market functioning”. The central bank is currently buying approximately $20bn of Treasuries a week, or an average of $4bn a day.
Bank of America’s Mr Cabana welcomed the move, adding it was “quite useful for markets to have clarity as to the Fed’s intentions on asset purchases”.
Mr Powell said the Fed was considering “explicit forms” of forward guidance on interest rates and asset purchases, which are part of its traditional crisis-fighting toolkit, as well as a more arcane approach dating back to the 1930s involving targeting interest rates along the yield curve. Mr Powell said the usefulness of the latter — called “yield curve control” — remained “an open question”.
While financial markets have stabilised, the US economy is facing a painful, lengthy recovery. According to labour department data, US employers unexpectedly boosted hiring by 2.5m jobs in May — but that still left employment 19.5m positions below where it was at the start of the year for an unemployment rate of 13.3 per cent.
Mr Powell described the jobs report as a welcome surprise, but suggested it was too early to determine that the recovery would be stronger than expected.
The Fed has been counting on Congress and the White House to continue providing fiscal support to the US economy, on top of the $3tn in stimulus passed since the crisis began. But the likely size of a new package has fallen and the timing of any deal has slipped as Republicans have balked at additional spending on aid to local government and an extension of jobless benefits.
“The question that I’ve been concerned about, really, is this issue of longer-run damage to the economy; we’re doing a fair job of getting through these first few months, more than a fair job,” Mr Powell said. “The question though is, that group of people who won’t be able to go back to work quickly, what about them? And that could be many millions of people.”
Since his last public remarks at the end of May, the US has been gripped my mass protests against racial inequality and police brutality, which Mr Powell addressed in his opening statement. He said the Fed “serves the entire nation” and there was “no place” for racism at the US central bank, or American society.
“Everyone deserves the opportunity to participate fully in our society and our economy,” he said. “These principles guide us in all we do, from monetary policy to our focus on diversity and inclusion in our workplace, and to our work to ensure fair access to credit across the country.”