United States: Fed keeps rates at effective floor in December and sustains commitment to expanding its balance sheet
December 16, 2020
At its 15–16 December 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 economic slack have dampened 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 increase its purchases of Treasury securities, and agency residential and commercial mortgage-backed securities, at least at the current pace of USD 80 billion per month and USD 40 billion per month, respectively. 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 December’s meeting, James Orlando, a senior economist at TD Economics, noted:
“Today's statement has also brought the Fed's balance sheet into focus. The Fed has previously hinted at introducing a qualitative approach to its asset purchases. With the policy rate firmly anchored at the lower bound, Quantitative Easing (QE) is the main policy tool for adjusting monetary conditions. Today, the Fed committed to a specific dollar amount of purchases that will continue until "substantial" progress is made in the economic recovery. Evidence of that progress is unlikely to be apparent until late 2021 or even 2022. Until that time, the Fed is committed to maintaining a heavy foot on the monetary gas pedal.”
The next FOMC meeting is scheduled for 26–27 January.
Author: Steven Burke, Economist