Key Points
- Fed holds rates steady, says economic growth is ‘well below’ pre-pandemic level [1]
“We are committed to using our full range of tools to support our economy in this challenging environment,” Fed Chairman Jerome Powell said.
The post-meeting statement labeled the current state of growth as better than it was at the trough but still not up to par.
“Following sharp declines, economic activity and employment have picked up somewhat in recent months but remain well below their levels at the beginning of the year,” the statement said. “Weaker demand and significantly lower oil prices are holding down consumer price inflation. Overall financial conditions have improved in recent months, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.”
“In short, this is a holding operation, pending developments with both the virus itself and fiscal policy,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
However, the committee did not provide any further indications of what it would take to change rates. Markets have been looking for enhanced “forward guidance” to indicate what unemployment and inflation metrics might trigger a change. Wall Street anticipates no changes and even is pricing in a chance of slightly negative rates ahead.
In addition to keeping rates unchanged, the committee also said it would extend dollar liquidity swaps and temporary repo operations through March 31, 2021. The swap lines were established during the current crisis as the way to keep U.S. dollars flowing to entities, including global central banks, in need of the currency.
“There’s nothing that’s going on in the markets right now that raises any concerns. We want them to be there as a backstop for the markets,” he said.
“But they (Fed) don’t have any tools to engineer a recovery, which means that fiscal policy will need to remain in place to support household incomes, especially as unemployment could increase in the months ahead as the true impact of the shock on the labour market is revealed.” [2]
The dollar =USD has been tumbling on expectations the Fed will continue its ultra loose monetary policy for years to come and on speculation it will allow inflation to run higher than it has previously indicated before raising interest rates.[2]
France’s economic slump may not be quite as bad as forecast and activity in the euro zone’s second biggest economy could return to pre-crisis levels in early 2022, the central bank governor has said.[3]
“Our forecasts predict a 10% fall in GDP this year: it may be a little better, with a strong rebound afterwards to hopefully regain a pre-COVID level of activity at the start of 2022,” Villeroy said in the interview published on Thursday.
“Public money is not unlimited,” he said. The ‘whatever it takes’ must progressively give way to the ‘when it is needed’.”