Fed promises to keep buying assets at current rate

The Federal Reserve kept its policy rate on hold at today’s (June 10) meeting and said its asset purchases will now continue at the current pace for the foreseeable future.

The pace of the asset purchases had been slowing, as market conditions have improved from the mid-March illiquidity and volatility strains.

The purchases will now continue “at least” at the current rate “to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions,” the statement said.

The current monthly rate of purchases is roughly $80 billion of Treasuries, $40 billion in mortgage-backed securities (MBS) and $500 million in commercial MBS. The balance sheet hit $7.2 trillion on June 2, up from $4.2 trillion in early March.

Fed chair Jerome Powell said the Fed will keep rates at 0–0.25% and its other tools in place for “however long it takes”. He said policy-makers are “not even thinking about thinking about raising rates”.

He added that while market conditions have improved, “we don’t take those gains for granted”.

“This is a highly fluid situation … and those purchases are supporting highly accommodative financial conditions and that’s a good thing,” he said. 

The chair also mentioned the Federal Open Market Committee had continued its discussions on the option of reinforcing its forward guidance with yield curve control. These discussions will continue to take place over coming months, he said.

“In terms of what we are looking for, we expect to get a better understanding of the economy’s trajectory and particularly how we should best deploy those tools to achieve those goals,” Powell said in response to a question asking when a more aggressive forward guidance strategy might be announced.

FOMC projections

The FOMC also released its economic projections today, having taken the decision not to publish the estimates after the March meeting due to the severe uncertainty surrounding the outlook at the time. The release marks the first time this year the committee has published forecasts.

The FOMC projects GDP will be -6.5% in 2020, which would mark the largest drop in output in a given year since Bureau of Economic Analysis records began in 1948. Participants anticipate a strong rebound to 5% in 2021.

Policy-makers project long-run growth to be 1.8%, which is 0.1 percentage points lower than the most recent projections in December.

The figures represent an average of all 12 reserve bank presidents and the five members of the board of governors. 

The average projection for unemployment implies the labour market might not return to its pre-pandemic levels by 2022. At least one participant, however, expects the rate to come close to the record lows seen in February.

Policy-makers see unemployment falling from the current 13.3% to 9.5% for 2020 as a whole, just short of the peak rate during the Great Recession.

Participants also see inflation rising slightly to 0.8% for 2020, up from the 0.5% reported in April. They project inflation to steadily rise to 1.6% in 2021 and 1.7% in 2022.

“We have to be humble about our ability to move inflation up,” Powell said. 

All FOMC participants anticipate keeping interest rates at the zero lower bound until 2021, while two see rate rises in 2022.

The US now has nearly two million confirmed cased of Covid-19 and 112,300 deaths. This is roughly the same number of cases as the next five countries – Brazil, Russia, the UK, India and Spain – combined. The worst affected regions are New York, with 30,500 deaths, and New Jersey, with 12,300 deaths.