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Fed decided to keep interest at the bottom


Friday, November 6, 2020

Federal Reserve officials are meeting this week with the economy facing growing threats from a resurgence of the coronavirus and from Congress' failure to provide any further aid for struggling individuals and businesses.

Yet the Fed will likely end its latest policy meeting Thursday by deciding to wait before determining whether or how to expand the economic support it has been supplying through ultra-low interest rates. The central bank has been buying Treasury and mortgage bonds to hold down long-term borrowing rates to encourage spending. And it has kept its key short-term rate, which influences many corporate and individual loans, near zero.

The Fed's meeting comes against the backdrop of an anxiety-ridden election week, with the results of Tuesday's voting still uncertain, and an escalation of the virus across the country. The economy and the job market have weakened again after initially strong bounce-backs from the pandemic-fueled recession that erupted in early spring. If the rise in confirmed COVID cases were to cause widespread business shutdowns or restrictions as cold weather arrives, consumers might cut back on spending and further slow the economy.

Heightening the risks, the multi-trillion-dollar stimulus aid that Congress passed in March and that helped sustain jobless Americans and ailing businesses has expired. Lawmakers have failed thus far to agree on any new rescue package, clouding the future for the unemployed, for small businesses and for the economy as a whole.

Most economists say that unlike Congress, the central bank may already have provided almost all the help it can for the economy through its low-rate policies. Fed officials themselves, including Chair Jerome Powell, have sounded a similar message.

In March, when the pandemic first struck, the Fed cut its key rate to an ultra-low range of 0% to 0.25%. In August, it announced that it planned to keep rates near zero even after inflation has exceeded the Fed's 2% annual target level. And in September, the policymakers signaled that their key rate would likely stay near zero at least through 2023 — and possibly longer.

Yet in recent weeks, various Fed officials have expressed concern that even more assistance might be needed, especially if the virus forces another round of lockdowns in the United States similar to what Europe is already experiencing.

“The Fed is going to be very worried about the risk of a double-dip recession given the lack of further support by Congress,” said Diane Swonk, chief economist at auditing firm Grant Thornton.

Some Fed watchers think the policymakers may be discussing whether to increase the power of their other major program — a bond buying effort that is intended to boost the economy by lowering longer-term borrowing rates. But any such announcement won't likely be made until a future meeting.

In mid-March, when the virus first hit hard, the Fed accelerated its bond purchases to try to ease disruptions in the Treasury bond market resulting from the outbreak. The central bank later modified the rationale for its bond purchases by saying they would help support the economy — the same reason it gave during earlier bond purchases that it engineered to bolster the weak recovery from the 2008 financial crisis.

In the past, critics have asserted that the Fed's aggressive bond buying risked destabilizing financial markets and triggering runaway inflation. That hasn't happened. And given the rising threat of another economic setback, many economists say the Fed will eventually increase the size of its bond purchases or shift the mix of those securities to longer-term securities — or perhaps some of both.

“While Congress is deadlocked, the only game in town is monetary policy,” said Sung Won Sohn, an economics professor at Loyola Marymount University in Los Angeles. “They have to do what they can.”

At a news conference he will hold Thursday, Powell won't likely reveal much about the Fed’s possible future moves. That is especially so given that the policymakers may be holding out hope that a logjam can be broken and more economic relief can be enacted during a “lame-duck” session of Congress between now and early January.

“The Fed is hoping beyond hope that we get a fresh rescue package from Congress soon,” said Mark Zandi, chief economist at Moody’s Analytics. “Fed officials have made it pretty clear they need help from Congress at this point.”

By: DocMemory
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