Fed To Continue Asset Purchases Until 'Substantial' Progress Toward Recovery

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While announcing its widely expected decision to leave interest rates unchanged, the Federal Reserve on Wednesday signaled that it plans to continue its asset purchase program until the economy shows substantial progressed towards the central bank’s goals of maximum employment and price stability.

The Fed said it decided to keep the target range for the federal funds rate at 0 to 1/4 percent, which is where the target range has remained since an emergency rate cut in March.

The accompanying statement reiterated that the Fed plans to keep rates at near-zero levels until labor market conditions have reached levels consistent with maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.

In one of the few changes to the November statement, the Fed also said it plans to continue purchasing bonds at a rate of at least $120 billion per month until “substantial further progress” has been made toward its policy goals.

“In isolation, that change in language indicates that the purchases could continue for longer than previously believed,” said Paul Ashworth, Chief U.S. Economist at Capital Economics.

He added, “But ‘substantial progress’ is still a suitably vague term and this change was well flagged in the minutes from the last FOMC meeting, which perhaps explains why the 10-year Treasury yield is up post-announcement.”

The Fed reiterated its assessment that the COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world.

“Economic activity and employment have continued to recover but remain well below their levels at the beginning of the year,” the Fed added, repeating remarks from its November statement.

In addition to announcing its latest monetary policy decision, the central bank also provided updated economic projections.

The latest projections show the Fed now expects the economy to shrink by less than expected in 2020 and grow by slightly more than expected in 2021 and 2022.

The Fed said it now expects GDP to contract by 2.4 percent in 2020 compared to the 3.7 percent contraction forecast in September. The estimate for the unemployment rate was also lowered to 6.7 percent from 7.6 percent.

Looking further ahead, the Fed expects GDP to grow by 4.2 percent in 2021 and by 3.2 percent in 2022, reflecting upward revisions from the previous projections of 4.0 percent and 3.0 percent, respectively.

The Fed’s latest projections show that the central bank continues to expect interest rates to remain at near-zero levels through at least 2023.


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