After firing out a series of unprecedented measures to backstop the U.S. and global financial systems and keep them running amid one of the deadliest virus outbreaks in modern history, the Federal Reserve on Wednesday said it was keeping rates on hold until at least 2022, and will continue doing what it takes to prop up the economy.
As expected, the Federal Open Market Committee, the group that collectively decides where to peg the nation’s benchmark interest rate, left the so-called fed funds rate unchanged at between zero and 0.25% at the end of its two-day meeting.
However, it did release its quarterly economic and interest rate forecasts, which it declined to do at the height of the crisis in March. That projection points to the Fed leaving rates unchanged through at least 2022.
The Fed did note that financial conditions have improved since mid-March, "in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses."
However, the ongoing public health crisis "will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term."
“The Fed is clearly signaling that we are not by any means out of the woods yet," said Aberdeen Standard Investment Senior Global Economist James McCann. “Powell is trying to send a strong signal here (Wednesday) that the Fed is going to keep policy very loose for a long time."
The central bank cut interest rates to near zero in March amid the global coronavirus pandemic, and has since moved to implement a series of lending and programs to lend to businesses, cities and states in order to offset the unprecedented drop-off in economic activity.
While officials have made clear they plan on holding rates at near zero until they are confident the economy is on track for inflation to reach its 2% target and for the unemployment rate to fall back in line, with the economy now opening back up investors and economists are looking for signs of what the Fed plans to do next.
The short answer is nothing, especially on the interest rate side. "We're not thinking about thinking about raising rates," Powell told reporters at a post-meeting press conference.
What they do plan to do next is continue buying up as much paper as comes their way.
The Fed is currently buying some $4 billion in Treasurys a day, and recently expanded that to include commercial bonds, or direct loans to businesses. Its balance sheet currently stands at a record $7-plus trillion.
To be sure, what some have dubbed the Fed's "venture capital-like" actions of greasing the economic system and buying up all kinds of assets, some economists are already anticipating a not-so-pretty outcome down the road.
"A key issue for the Fed going forward is Yield Curve Control (YCC), which anchors rates of given Treasury maturities at a set level," noted Danielle DiMartino Booth, CEO and Chief Strategist of Dallas-based Quill Intelligence and a former Fed advisor.
Indeed, the Fed on Wednesday said it expects the U.S. economy to contract 6.5% in 2020, but then expand by 5% in 2021, raising the specter of a possible boomerang recovery that may still be fraught with both uncertainty and possibly inflation.
"While the Fed was successful in helping the stock market recover from the coronavirus-driven selloff in March, the jury is out on how much the Fed is helping the economy recover," said DiMartino Booth. "Analyzing the Fed's economic projections at this time when much of the economy is still opening is riddled with uncertainties."