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United States Monetary Policy April 2020

United States: Fed stresses commitment to deploying full arsenal to support ailing economy at April meeting

At its 28–29 April meeting, the Federal Open Market Committee (FOMC) held 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 a heavily bruised U.S. economy, which is reeling in the wake of the Covid-19 pandemic.

In the accompanying press conference, Chairman Jerome Powell acknowledged economic activity will likely “drop at an unprecedented rate” in the second quarter. The April jobs report, out on 8 May, is expected to show the unemployment rate has surged into double digits from the five-decade lows seen only a few months ago. Meanwhile, the drop-off in economic activity and global oil price collapse are suppressing price pressures and will likely keep inflation well below target this year.

Powell acknowledged the “broad and forceful” measures the FOMC has taken to ensure credit flows to households and businesses are essential for mitigating the impact of the pandemic and to set the stage for a swift recovery. The Fed also reaffirmed its commitment to its massive scale asset purchasing of Treasury, agency residential and commercial mortgage-backed securities, with the Fed’s balance sheet reaching a record USD 6.5 trillion in late April. However, Powell noted its pace of purchasing has slowed recently as financial market conditions have begun to smooth out. The Fed’s lending powers are being used to an unparalleled extent in the institution’s history and Powell noted that the FOMC would continue to wield those powers aggressively until it is confident the economy is back on track. Particularly, the corporate credit facilities and the Main Street Business lending program are expected to come online in the near future.

Notably, Powell again called on the government to use fiscal policy to target individuals and businesses who need direct support and would not benefit from a loan, remarking that “it may well be the case that the economy will need more support if the recovery is to be a robust one”. The chairman emphasized the Federal Reserve does not and cannot make grants under its legislative authority.

Commenting on the press conference, analysts at Nomura noted:

“[Powell] also went to some length in emphasizing that, ultimately, the Fed’s powers to support the economy are limited. He contrasted the constraints on what the Fed can do, under existing statutory authority, with the broad tax and spending powers that the Constitution gives to Congress. Powell emphasized the importance of the fiscal response to COVID-19. Furthermore, he argued that ‘this is not the time to act’ on fiscal sustainability concerns.”

In its forward guidance, the Fed stated that the Committee “expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” Given the severity of the economic fallout, an overwhelming majority of FocusEconomics panelists expect the Fed to hold rates at near zero until at least the second half of 2021.

The next FOMC meeting is scheduled for 9–10 June.

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