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According to the Federal Reserve, the U.S. economy faces “considerable risks” over the medium term. The Fed promised to maintain a near-zero level of interest rates and keep buying bonds.
On Wednesday, the Federal Reserve explained what kind of policy it would apply while the economy is recovering from the COVID-19 pandemic. The Fed held near-zero interest rates the whole day, saying it would maintain that level until the end of 2022. In addition, the Fed promised to do anything needed to support the U.S. economy. For a start, it would keep buying assets, increasing the number of Treasurys and mortgage-backed securities.
Fed Chairman Jerome Powell said:
“We’re not even thinking about thinking about raising rates. We are strongly committed to using our tools to do whatever we can for as long as it takes.”
The Fed’s interest-rate outlook for 2020, 2021, and 2022 was totally different before the pandemic. In comparison with previous projections of 1.6%, 1.9%, and 2.1% respectively, it lowered to 0.1%. In March, the Fed cut its benchmark interest rate to a range of 0% to 0.25%. It was one of its earliest moves to handle the coronavirus pandemic’s economic toll. But it was not expected the Fed would decide to maintain near-zero interest rates for such a long period.
Fed to Buy More Assets
Further, the Fed said it would keep buying bonds. It promised to target $80 billion a month in Treasurys and $40 billion in mortgage-backed securities.
The Federal Open Market Committee explained:
“To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions.”
Since March, when the market collapsed, the Fed has bought $2.2 trillion in bonds. But as the markets are now functioning pretty well, the Fed’s purchases have slowed.
Fed’s Updated Projections
Speaking of the economy in general, the Fed predicted GDP tumbling 6.5% in 2020 but rebounding to a 5% gain in 2021. According to the central bank, the U.S. economy faces “considerable risks” over the medium term.
As for unemployment, the Fed expects it to fall to 9.3% at the end of this year, up from 3.5% before the crisis, and drop to 6.5% in 2021. In 2022, the jobless rate is expected to be at 5.5%.
According to Jerome Powell, the 2.5 million job gains in May serve as an indicator of the rebounding economy. He said:
“The May employment report was a welcome surprise, very pleased. But it’s a long road. Activity in many parts of the economy has yet to pick up.”
The employment rebound has started last month, but it is very slow. For revision, a record 22 million jobs were lost in March and April, blowing up all of the gains since the Great Recession of 2007-2009.