The Federal Reserve made a key adjustment in its efforts to support the economy, while improving its future growth outlook.
As expected, the Fed kept benchmark interest rates close to zero after concluding the two-day meeting on Wednesday.
Investors looked at whether the Fed would define results-based guidelines in which it would set out the conditions necessary for a policy reversal.
The Fed delivered in this regard, saying it would continue to buy at least $ 120 billion in bonds each month “until they have made substantial progress toward the Committee’s maximum price stability and employment targets,” the statement said after the meeting.
“These asset purchases help foster the smooth running of the market and accommodative financial conditions, supporting the flow of credit to households and businesses,” the Federal Open Market Committee said in a statement. unanimous approval.
The committee, however, did not say it would extend the duration of these purchases.
The Fed had already pledged not to raise rates until inflation exceeds its 2% target, even if unemployment falls to levels that had normally signaled price pressures. Changing the language around asset purchases underscores the central bank’s commitment to seeing the recovery from the fall of the coronavirus era.
Markets had been looking for possible tweaks that FOMC policy would make to its asset purchase program. Since the early days of the coronavirus pandemic, the central bank has bought mostly short-term bonds in an effort largely aimed at keeping financial markets afloat.
In recent meetings, officials have been discussing the benefits of extending bond terms in a more effort-driven effort to boost the economy, just as it did after the 2008 financial crisis.
Extending the duration helps reduce long-term rates, reduce debt costs, and help drive profitable investors into riskier assets, such as equities.
Changes in the economic outlook
In addition to changing the language around the bond-buying program, Fed officials raised their outlook on the economy since the last September forecast.
The average expectation of gross domestic product in 2020 is now down 2.4%, compared to the negative 3.7% in September. The outlook for 2021 is now 4.2% compared to 4% previously and 3.2% in 2022 compared to 3%.
The outlook here fell slightly, from 2.5% in 2023 to 2.4% and in the long run to 1.8% from 1.9%.
The committee also offered a considerably more optimistic outlook on unemployment. In 2020, the year-end rate is expected to be the current 6.7%, compared to the 7.6% forecast for September. In 2021, the average projection is 5%, 5.5%, while the next two years are 4.2% (4.6% previously) and 3.7% (4%).
Officials still expect to be shy of the Fed’s 2% inflation target until 2023, although in 2020 and the next two years there were increases of 0.1 percentage points to the outlook, up to 1.4%, 1.8% and 1.9%, respectively.
The language elsewhere in the statement showed basically no change with respect to the November meeting.
The Fed continues to recover economic activity, but “well below” the pre-pandemic level. Overall, the committee expects the pandemic to “continue to weigh on economic activity, employment,
and inflation in the short term, and poses a considerable risk to the medium-term economic outlook. “
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