United States: Fed keeps rates at effective floor and sustains its commitment to expanding its balance sheet
September 16, 2020
At its 15–16 September 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 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. Despite the domestic economy showing some signs of recovery in recent months, measures to contain the spread of the virus have battered the labor market, 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.
Following its annual Jackson Hole Symposium on 27 August, the Fed outlined the strategic review of its monetary policy strategy going forward amid the elevated unemployment rate and relatively soft inflationary pressures due to the pandemic. The Committee now see GDP contracting 3.7% in 2020 before growing 4.0% in 2021.
Looking ahead, the Fed will likely keep its 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 August’s meeting, James Marple, a senior economist at TD Economics, noted:
“Indeed, despite its stated goal of achieving inflation above 2%, few members expect it to actually do so. It is not just the median, but also the central tendency of estimates that remains below 2.0%. This suggests that a majority of members anticipate the federal funds rate to be on hold even past 2023.”
The next FOMC meeting is scheduled for 4–5 November.
Author: Steven Burke, Economist