United States: Fed keeps rates at effective floor and sustains commitment to expanding its balance sheet
November 5, 2020
At its 4–5 November meeting, the Federal Open Market Committee (FOMC) decided to hold the target range for the federal funds rate at its effective floor of 0.00%–0.25%. Moreover, the Fed reaffirmed its commitment to using its full range of powers to support the economic recovery at its current pace. The decision was widely anticipated by market analysts.
The Fed kept the target range at its effective floor due to the economic turmoil caused by the ongoing public health crisis, which is expected to keep employment and inflation levels depressed in the short term. Employment levels remain well below their pre-pandemic levels, despite improving in recent months, while low oil prices and weak demand have undermined inflationary pressures. To ensure sufficient liquidity for households and businesses and the effective transmission of monetary stimulus to broader financial conditions, the Fed reaffirmed its commitment to maintain its purchases of Treasury securities, and agency residential and commercial mortgage-back securities, at least at its current pace. Furthermore, the Bank will also continue to offer large-scale overnight and term repurchase agreement operations.
Looking ahead, the Fed will likely keep the target policy rate at its current level until “labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time”.
Commenting on November’s meeting, James Orlando, a senior economist at TD Economics, noted:
“Today's statement hasn't changed our outlook. The Fed is years away from hiking rates. It will continue to actively buy U.S. government debt to keep yields low. This will keep borrowing costs for households and businesses close to historically low levels for the indefinite future.”
The next FOMC meeting is scheduled for 15–16 December.
Author: Steven Burke, Economist