Interest rates are to be unchanged at near zero ( 0-0.25 per cent ) announced The Federal Reserve System’s Board of Governors (the Fed) of the United States while concluding its two-day monetary-policy meeting on Wednesday, September 16. This is yet another decided and dominant signal that its monetary policy will effectively be on hold for the next few year. In order to help the economy recover and add jobs for as long as possible, most members of the Federal Open Market Committee (FOMC) said that they expect to keep rates at near-zero until the end of 2023.
“Increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses” was said by the Fed addressing the first time rate setting committee. The US central bank is purchasing government securities at a rate of $120 billion per month, consisting of $80 billion in Treasuries and $40 billion in mortgage securities. It is only appropriate that this fast pace of asset purchases given ongoing impact of the coronavirus pandemic but also suggested that it could be changed should the economic and financial conditions justify doing so, said The Fed’s chairman, Jerome Powel.
Updating their economic projections, penciling in a smaller gross domestic product (GDP) contraction for this year (but one that will grow more slowly in 2021 and 2022 than its previous June forecast) as well as a lower unemployment rate (- 7.6 percent by the end of 2020 and down to 4 percent by 2023).
Powell shared his support for more fiscal stimulus in order to facilitate the recovery of the economic stats. He said,“My sense is that more fiscal support is likely to be needed,” he said. “Of course, the details of that are for Congress, not for the Fed. But I would just say there are roughly 11 million people still out of work due to the pandemic, and (a) good part of those people were working in industries that are likely to struggle. Those people may need additional support as they try to find their way through what will be a difficult time for them.”
If or not the inflation is to rise about 2 per cent is to be seen anytime soon. On the other hand, Rick Rieder, chief investment officer of global fixed income and head of the Global Allocation Investment team at Blackrock, thinks that, “Still, we’re skeptical about the achievability of this inflation goal at a time when the disinflationary influences of technological innovation and the demographic trend of population aging arguably hold a greater impact on the rate of inflation than central bank policy does.”
The Fed also indicated that it would not tighten any monetary policy and it will be on track to ‘’achieve inflation moderately above 2% for some time so that inflation averages 2% over time and longer-term inflation expectations remain well anchored at 2%,” meaning that there was an anticipation to maintain an accommodative stance of monetary policy until the outcomes are achieved. All these are the reflections of the central bank’s recently announced shift in policy towards an average inflation targeting (AIT) framework. “This is all about credibility, and we understand perfectly that we have to earn credibility,” Powell acknowledged, adding that the Fed governors “have to support it with our actions, and I think today is a very good first step in doing that. It is strong powerful guidance.”
