Fed forecast points to funds rate near zero through end of 2021

Powell plays down risk of easy monetary policy stoking an asset bubble


US Federal Reserve chairman Jerome Powell sent a powerful message on Wednesday that the central bank will keep pumping stimulus into the US economy until its traumatised labour market has healed from the harm of the coronavirus pandemic.

"We are not even thinking about raising rates," he told a video press conference after the Federal Open Market Committee (FOMC) held its policy benchmark near zero and almost all officials forecast keeping it there through 2022.

"We are strongly committed to using our tools to do whatever we can for as long as it takes," he said.

"The Fed is clearly very sensitive to the fact that the Great Depression was made worse by not taking action, and they don't want to make that mistake again," said Stephen Stanley, chief economist at Amherst Pierpont Securities.

"The Fed, at least right now, wants everyone to believe that it will be easy for as far as the eye can see."

US stocks fluctuated and the dollar slumped as investors assessed the Fed's views on the economy. The Dow Jones Industrial Average eventually ended down 1.04 per cent, while the S&P 500 lost 0.53 per cent, and the Nasdaq Composite gained 0.67 per cent.

On Thursday, as at 11am (EDT), the Dow was down 1,042.26 points at 25,947.73.

The 10-year Treasury yield slid to the lowest in a week, at 0.72 per cent, as bond bulls were emboldened by the central bank's signal that it would keep rates near zero and continue its bond buying.

The FOMC said it would increase its holdings of Treasuries and mortgage-backed securities "at least at the current pace" to sustain smooth market functioning.

A related statement from the New York Fed specified that the pace of the balance-sheet increase would be maintained at about US$80 billion a month for purchases Treasuries and about US$40 billion for mortgage-backed securities.

"Acting on mortgage-backed securities and Treasuries underscores their belief that more support is needed," said Diane Swonk, chief economist with Grant Thornton in Chicago.

"The Fed does not see a victory in the employment bounce-back. The risk of deflation is still high and the economy needs more support to heal more fully."

Asked about the risk of easy monetary policy stoking an asset bubble, Mr Powell played it down by stressing the Fed was concentrating on restoring full employment and stable prices.

"We are tightly focused on our real economy goals and we're not focused on moving asset prices in a particular direction at all," he said.

The Fed's quarterly projections - updated for the first time since December 2019, after officials skipped their March release amid the burgeoning pandemic - showed all policy makers expect the funds rate to remain near zero through the end of 2021. All but two officials saw rates staying there through 2022.

The economy faces "considerable risks" over the medium term, the Fed said in its statement, reiterating language from the last FOMC meeting in late April.

Officials forecast the US unemployment rate would fall to 9.3 per cent in the final three months of the year from 13.3 per cent in May, according to median estimates, and to decline to 6.5 per cent in 2021.

US GDP was projected to contract by 6.5 per cent this year before rebounding 5 per cent next year. Inflation was forecast to remain below the Fed's 2 per cent target through 2022.

The better-than-expected May payroll report could mark the low point for the labour market, Mr Powell said, though the fact that it caught so many people by surprise "is clear evidence of just how uncertain things are". He also cautioned that the labour market would take time to heal.

"My assumption is that there will be a significant chunk, well into the millions of people who don't get to go back to their old jobs and there may not be a job in that industry for them for some time. It could be some years before we get back to those people finding jobs," he said.

Mr Powell said the FOMC had received a briefing on yield-curve control - a strategy to cap Treasury yields out to a specific maturity - and told reporters that such discussions will continue at upcoming meetings. Economists surveyed by Bloomberg expect them to consider adopting the strategy later this year.

US central bankers are waiting for more clarity about the shape of the recovery before rolling out a policy strategy that may involve explicit forms of forward guidance, Mr Powell said.

Laura Rosner, senior partner at MacroPolicy Perspectives in New York, said: "People are saying, 'We are going to be easy for a long time. There is no rush here."

The projection to leave rates unchanged for the next 2.5 years is a "down payment" on more strategic forward guidance that the committee could roll out later this year, she added.

The central bank has unveiled nine emergency lending programmes to keep credit flowing during the pandemic, though three are still to launch including a facility aimed at Main Street businesses.

On Monday, it expanded this programme to include smaller companies and said it would be open to eligible lenders "soon".

Mr Powell repeated this outlook and also said the Fed was looking very strongly at how it could incorporate non-profit organisations in either the Main Street programme or in a facility of its own.

Fed officials have also made the case for more fiscal policy support in recent weeks, with Mr Powell noting repeatedly that the central bank can only make loans it expects to get paid back, while grants backed by taxpayer money may be more appropriate in some cases during the pandemic.

Congress has already approved around US$3 trillion in pandemic aid, including enhanced unemployment insurance benefits that are currently due to expire on July 31.

Lawmakers have not yet reached any agreement on another round of stimulus as Democrats demand assistance for states whose budgets have been hit by declining revenue. BLOOMBERG


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