Tuesday, 2 Mar 2021

Fed Leaves Rates Unchanged and Commits to Ongoing Bond Purchases

WASHINGTON — Federal Reserve officials pledged to help the economy through the painful pandemic era and tied the central bank’s bond-buying program to its goals of full employment and stable inflation, closing out a year of dramatic action meant to cushion the blow to businesses and the labor market.

“The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time,” Fed officials reiterated in their December policy statement, released Wednesday afternoon, after a two-day meeting.

The central bank cut interest rates to near-zero in March and has been buying about $120 billion in government-backed debt each month to soothe markets and help to goose growth. The Fed’s statement suggested it will keep buying bonds for some time, saying it will continue to increase its holdings of Treasury securities at the current pace “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”

Fed Chair Jerome H. Powell, speaking at a news conference following the meeting, said the central bank’s decision to keep interest rates low for the foreseeable future and to continue buying bonds ensures that the Fed will “deliver powerful support to the economy until the recovery is complete.”

Coronavirus vaccines, currently being rolled out, have stoked hopes that the economy will snap back strongly as early as next year after plunging into a deep and sudden contraction in early 2020.

The central bank’s summary of economic projections showed that Fed officials had a slightly more optimistic outlook for growth and unemployment at the end of 2020 and in coming years than they had in September, with unemployment declining to 5 percent in 2021, versus its previous prediction of 5.5 percent.

Still, the median Fed official continued to project interest rates near-zero through the end of 2023, underlining that the central bank sees a long period of patient policy ahead.

“The next few months are likely to be very challenging,” Mr. Powell said. While he called the development of a vaccine “positive,” Mr. Powell warned that challenges remain in terms of its rollout and said it is “difficult to assess” when economic activity will return to normal.

“A full economic recovery is unlikely until people are confident that it is safe to re-engage in a broad range of activities,” he said.

The central bank must position its policy to get workers and companies through the next challenging months. Data including retail sales and jobless claims have taken a turn for the worse as coronavirus cases rise and state and local governments reintroduce lockdown measures to try to slow the spread of the virus and prevent hospital overcrowding.

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The labor market fallout remains painful and remarkable. America had nearly 10 million fewer jobs in November than in February. New unemployment claims are ticking back up after moderating, Labor Department data showed last week, and remain sharply elevated from earlier this year. The hit has been especially intense for women, those with lower education levels, and people of color. The unemployment rate for Black adults stood at 10.3 percent in November, nearly double pre-pandemic levels. Unemployment has also rocketed higher for Hispanic workers, who had a jobless rate of 8.8 percent more than double pre-pandemic levels.

Congress charges the Fed with two jobs: It is supposed to foster maximum employment and low and stable prices. Returning a flailing economy to those conditions quickly could prove to be a major task.

The central bank’s policies mainly work by making credit cheaper so that households and businesses will have an incentive to borrow and spend, pumping up demand in the economy. Faced with more demand, the logic goes, employers will hire and will have the wherewithal to lift wages and prices.

The Fed had traditionally used its policy interest rate — the federal funds rate — as its primary policy tool, but it has cut that rate to rock bottom in the last two crises. Both in 2008 and now, the central bank has turned to large-scale bond purchases as a supplementary policy lever.

Bond buying works both to calm markets by creating a constant source of demand for government-backed securities, and provides a boost to the economy both by lowering longer-term interest rates and by nudging private sector money into slightly riskier investments, like stocks.

Mr. Powell suggested that the Fed would be in no hurry to stop its asset purchases, which he called “accomodative” — meaning they are aimed at bolstering the economy — saying the time when they are no longer necessary is “some ways off.”

The central bank has also implemented an array of emergency lending programs during the pandemic recession, commonly called “13-3 programs” for the section of the statute that enables them. Its efforts have bought corporate bonds, lent to small and mid-sized businesses, and helped to keep credit flowing to state and local governments.

While those programs have been the subject of criticism at times for their stringent terms, or for propping up big corporations more effectively than small ones, they have also provided a key backstop for financial markets during a fraught period.

Steven Mnuchin, the Treasury secretary, has to sign off on such efforts. He said last month that he would be shutting down five of the loan programs, all of which were backed by a congressional appropriation. The Fed deferred to him on the decision — which Mr. Mnuchin said was necessary under his reading of the law — but expressed dissatisfaction with his choice.

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