Federal Reserve Updates
Sign up for myFT Daily Digest to be the first to hear about Federal Reserve news.
The Federal Reserve has said it will continue to buy at least $ 120 billion in debt per month until “further substantial progress is made” in the recovery, thereby strengthening its support for the US economy in a context coronavirus epidemic.
The advice from the Federal Open Market Committee came at the end of a two-day meeting in which Fed officials improved their economic projections but maintained their forecast that they would keep their interest. rate close to zero at least until the end of 2023.
The language on debt buying reflects the Fed’s commitment to keep interest rates close to zero until the economy reaches full employment and inflation is on the right track exceed its 2% target for a while.
But it has not responded to calls for a stronger monetary stimulus to cope with the fading recovery by lengthening the average maturity of its bond purchases or increasing the overall size.
“The Federal Reserve will continue to increase its holdings of treasury securities by at least $ 80 billion per month and agency mortgage-backed securities by at least $ 40 billion per month until substantial progress has been made towards the committee’s maximum employment and price stability targets, ”the FOMC said.
“These asset purchases help promote the proper functioning of the market and accommodating financial conditions, thus supporting the flow of credit to households and businesses,” he added.
The guidance sets a longer horizon for the Fed’s bond purchases; the previous communiqué indicated that they would only continue in the “coming months”. The rest of the FOMC statement remained largely unchanged, with policymakers describing the the economy recovering suddenly caused by the pandemic, but still functioning well below capacity.
At the press conference following the last FOMC meeting of the year, Jay Powell, the Fed chairman, called the new guidance on asset purchases a “powerful message” on the bank’s resolve. central to continue to support the recovery.
“What we’ve done is we’ve charted a course where we’re going to maintain a very accommodative monetary policy for a long time. . . until we hit very close to our goals, which isn’t really how it’s been done in the past, ”he said.
The Fed chairman nevertheless stressed that fiscal policy would be the most effective way to weather the difficult economic period in the months to come. “It looks like a time when what’s really needed is fiscal policy and that’s why it’s a very positive thing that we’re getting this,” he said, as Congress moved closer to a $ 900 billion stimulus package.
The US economy is expected to contract to a rate of 2.4% in 2020, followed by a rebound of 4.2% next year, two figures slightly better than forecast, according to projections by the Fed’s median policymaker. from the central bank in September.
While recent economic data has shown a slowdown in the labor market recovery and weakness in retail sales, the medium-term situation has improved thanks to a faster than expected deployment of vaccinations against Covid-19.
U.S. central bank expectations for the timing of interest rate hikes have remained largely unchanged, with just one in 17 expecting higher rates in 2022, and five expecting a hike in 2023 .
Long-term US Treasuries initially sold off after the report, pushing the yield on the benchmark 10-year bond up 0.03 percentage point to 0.94% before falling. Two-year Treasuries were little moved, with the yield stable at 0.12 percent.
The S&P 500 has slipped before climbing again to close 0.2 percent higher.
Peter Tchir, chief macro strategist at Academy Securities, said the brief sale reflected some disappointment among investors over the Fed decision to suspend on adjusting its bond purchase program. “There was a little hope that they would be a little more aggressive,” he said.