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The Fed had previously announced that it would maintain its zero interest rate policy. The key interest rate will remain in its previous range on the zero line. Economists had unanimously expected this decision. After the corona pandemic spread to the United States in March, the Fed lowered the key interest rate in two big steps to the current level.
In addition, the Fed announced that it would continue to buy multi-billion dollar securities “at least” at the current rate. Currently, the Fed is buying government bonds worth $ 80 billion a month. He also buys mortgage-backed securities (MBS) valued at $ 40 billion a month. As a result of these purchases, the Fed’s balance sheet has risen to a lonely record of around $ 7 trillion.
The Fed is also giving markets more leadership. Consequently, the zero interest rate policy will continue until full employment is achieved in the labor market. Furthermore, inflation is expected to rise to two percent and remain moderately above two percent for some time. The latter corresponds to the new inflation target the Fed had already announced. Now it is no longer primarily a points goal, but an average goal.
Federal Reserve Chairman Jerome Powell confirmed the prospect of years of zero interest rates to the press. The monetary policy signals are meant to be permanent and should support the economy for years to come. Regarding the new inflation target, Powell said the Fed did not want to propose a specific formula or rule. The public will understand what is meant by the goal of moderate inflation above two percent. In any case, the Fed does not aim to exceed the target rate by a large amount.
Powell also reiterated his view that the state should increase its financial support during the crisis. Republicans and Democrats are currently arguing in the United States Congress about the modalities of another aid package. This is the volume of the package. Democrats want to provide additional funding in the trillions, Republicans want to put together a much smaller package.
As the Fed’s projections show, the Fed’s assessment of this year’s economic slump is no longer as dramatic. If you had previously expected a 6.5 percent economic recession, now you are assuming a 3.7 percent drop in economic output. The effects on the labor market are also expected to be somewhat less drastic. Inflation forecasts have been raised slightly.
The Fed’s projections result from the average assessments of individual monetary policy decision makers. Therefore, they represent an average expectation. Therefore, four central bankers can at least imagine an interest rate hike in 2023. However, in doing so, he represents a clear minority opinion on the FOMC’s Monetary Policy Committee.
In financial markets, the US dollar gained after the Fed’s decisions. The US Dow Jones stock index initially reacted with significant gains, but these could not be fully sustained. US government bonds initially fell in price, but were able to recover.
/ bgf / jsl / fba
WASHINGTON (dpa-AFX)
Image Sources: Spirit of America / Shutterstock.com, tlegend / Shutterstock.com
