Interest Rate in USA

USA - Interest Rate

Fed keeps rates at effective floor and sustains its commitment to expanding its balance sheet

At its 28–29 July 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 decided to keep the target range at its effective floor due to poor economic prospects amid the ongoing public health crisis, which are expected to keep employment and inflation levels depressed in the short term. Measures to contain the spread of the virus have battered employment, while low oil prices and weak demand have undermined inflationary pressures in recent months. To ensure sufficient liquidity for households and businesses and the effective transmission of monetary stimulus to broader financial conditions, the Fed will maintain its purchases of Treasury securities, and agency residential and commercial mortgage-back securities, at its current pace. It will also continue to offer large-scale overnight and term repurchase agreement operations.



In addition, at its annual Jackson Hole Symposium on 27 August, the Fed outlined its strategic review of its monetary policy strategy going forward amid the elevated unemployment rate and relatively soft inflationary pressures due to the pandemic. The Fed indicated a major shift in its policy objectives with the introduction of a flexible form of average inflation targeting, which will allow inflation to run temporarily above its previous 2.0% objective following periods of running below 2.0%. This shift in stance allows the Fed to refrain from raising interest rates once inflation runs above 2.0%, helping it to further support the economic recovery. The Fed also changed its stance on its full-employment mandate, emphasizing its goal of reaching maximum employment. Consequently, the Fed will refrain from tightening its stance simply because unemployment is close to or below previous historical lows.

Looking ahead, the Fed emphasized that it will likely keep the target range and its asset purchasing programs at their current rates until “it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals”. The Bank also stressed that it stands ready to act appropriately to support the economy if conditions deteriorate further.



Commenting on July’s meeting, James Marple, a senior economist at TD Economics, noted: “The statement did not make mention of fiscal policy, but you can bet that Chair Powell will at his virtual press conference. As he has in the past, we expect him to encourage Congress to come together on another fiscal support package.”



Moreover, commenting on August’s Symposium, analysts at Credit Suisse noted:



“Overall, the revised statement does not imply changes to our near and medium term policy outlook. Following a revised inflation target, we expect the next policy innovations from the Fed would be outcome-based forward guidance. Yield curve control is another option for easing, but many officials are skeptical and this would likely only be implemented if economic and financial conditions change markedly.”



The next FOMC meeting is scheduled for 15–16 September.

FocusEconomics Consensus Forecast panelists project the federal funds target rate to end 2020 at 0.25% and 2021 at 0.28%.