Fed to Maintain Bond Buys Until ‘Substantial’ Economy Gains Seen

The Federal Reserve strengthened its commitment to support the U.S. economy, promising to maintain its massive asset purchase program until it sees “substantial further progress” in employment and inflation.

At their final meeting of a tumultuous year, policy makers led by Chair Jerome Powell on Wednesday voted to maintain monthly bond purchases of at least $120 billion and scrapped their previous pledge to keep buying “over coming months.”

They didn’t announce changes to the composition of purchases in their statement, declining to shift them toward longer-term maturities as some economists had recommended.

Powell called the new language on asset purchases “powerful,” but declined to specifically define what inflation and unemployment rates would trigger a future change in the buying campaign.

“I can’t give you an exact set of numbers,” he told reporters during a press conference to explain the decision. He added the point at which the economy might meet these conditions was “some ways off.”

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The Fed meeting came as lawmakers on Capitol Hill tried to wrap up an agreement on new stimulus after months of deadlock, with both fiscal and monetary policy poised to help continue cushioning an increasingly shaky economy during the wait for widespread vaccine distribution.

Ten year Treasury yields rose after the statement was released to trade at about 0.94% – up from about 0.91% just before. Stocks turned positive as Powell spoke.

“The Fed marked up growth in each of the next two years, marked down unemployment, and market up core inflation. Despite this, they don’t expect to move rates. Good for risk appetite. Buy stocks,” said Neil Dutta, head of U.S. economic research at Renaissance Macro Research.

What Bloomberg Economists Say…

“The absence of any hints that QE could become more aggressive in the near term will dampen expectations for greater accommodation in the first quarter.”

— Carl Riccadonna, Yelena Shulyatyeva and Andrew Husby (Bloomberg economists)

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The Federal Open Market Committee said “economic activity and employment have continued to recover but remain well below their levels at the beginning of the year.” Its quarterly projections for the economy showed some improvement compared with September.

The committee unanimously kept the federal funds target rate in a range of zero to 0.25%, where it’s been since March, and a majority of Fed officials continued to forecast that their benchmark lending rate would be held near zero at least through 2023.

Powell said the next several months will be challenging, noting that many people are still lining up for food and some small businesses are struggling to hold on.

“Now that we can kind of see the light at the end of the tunnel,” Powell said, “it would be bad to see people losing their business” because they couldn’t last another few months. He vowed that the Fed would continue to use all its tools to keep supporting the economy to bridge that gap.

Read more: Powell Wins a Place in Pantheon of Fed Chiefs Alongside Volcker

The FOMC “expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time,” policy makers said, repeating language from their November statement.

The central bank’s meeting builds on their earlier response to the coronavirus pandemic, in which officials cut interest rates to near zero while unleashing massive bond purchases and a multitude of emergency lending programs.

U.S. central bankers are still far away from their goals, and Powell has repeatedly called on Congress to pass another round of fiscal stimulus to help the economy through the winter as the pandemic continues to rage. The unemployment rate stood at 6.7% in November, while inflation remains below 2%.

Even so, financial markets have been buoyed by investors counting on steady growth next year as more people are vaccinated, as well as pent-up consumer demand, low interest rates and maybe another round of fiscal stimulus. The S&P 500 index set a record high earlier this month, while yield spreads on corporate bonds are trading around pre-pandemic lows.

Despite the ebullience in markets, non-farm payroll growth slowed to 245,000 in November — less than half the gain in October — and employment is still down roughly 10 million compared with before the virus struck. U.S. retail sales dropped by more than forecast in November and the prior month was revised to a decline, the first drops since March and April, data showed earlier Wednesday.

Updated Projections

The Fed’s quarterly projections showed some improvement compared with September. Here are some highlights:

  • Gross domestic product: Down 2.4% in 2020 (prior estimate was 3.7% contraction); 4.2% growth in 2021
  • Fourth-quarter unemployment rate: 5.0% in 2021 (prior estimate 5.5%), 4.2% in 2022
  • PCE inflation: 1.8% in 2021 (prior estimate 1.7%), 1.9% in 2022
  • Longer-run federal funds rate: 2.5%, unchanged from prior projection of 2.5%

— With assistance by Jeff Kearns, Matthew Boesler, Liz McCormick, Steve Matthews, Catarina Saraiva, and Christopher Condon

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