Fed Holds on Rates and Reinforces Support for U.S. Economy

The Federal Reserve reinforces its pledge to continue backstopping the pandemic-stricken U.S. economy.
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The Federal Reserve ended its meeting on Wednesday with no change to its benchmark interest rate, which currently rests at record lows, but a reinforced pledge to continue backstopping the pandemic-stricken U.S. economy.

The Federal Open Market Committee wrapped up the two-day meeting by keeping the fed funds rate at between zero and 0.25%, with no new economic projections though a reinforced commitment to continue to do whatever it takes to keep the economy and financial markets running smoothly - and help heal the upended labor market.

"The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world," the FOMC said in its statement. "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 FOMC telegraphed little incremental change to the Fed’s approach today, but the committee has been heard loud and clear that it is staying the course with its unprecedented monetary support for the U.S. economy," said Jason Pride, CIO of private wealth at Glenmede. 

Indeed, policy-makers confirmed that with renewed signs that the U.S. economy may be losing momentum following a boomerang-like bounce back they will continue both buying up assets to stabilize financial markets and bolster economic growth, which is expected to have contracted by double-digits in the second quarter.

"The Fed wasted no time and almost immediately deployed all reasonable tools at its disposal to help carry the economy through the shutdown," Stifel Chief Economist Lindsey Piegza wrote in a research note ahead of the Fed's announcement.

"Now, rather than implement further measures, the Fed will expectedly continue to nurture the policies and initiatives already in place." 

To be sure, the economic backdrop has changed notably since the Fed’s rate-setting committee met seven weeks ago - and not in a good way. After surprising rebounds in employment in May and June, many states have seen a surge in virus infections, leading to renewed limits and closures on businesses and a corresponding rebound in unemployment. 

"Though the employment situation has progressed since the last meeting, fresh shutdowns put jobs in jeopardy," said Mike Loewengart, Managing Director, Investment Strategy with E*TRADE Financial. 

Fed officials have already pledged to keep rates at zero through 2022 and have also pledged to continue buying Treasurys and mortgage bonds. Since mid-June, the Fed has been buying $80 billion in Treasurys a month and $40 billion in mortgage bonds, net of redemptions. The Fed has bought $2.5 trillion in assets since March.

That message was reinforced on Wednesday, with the Fed noting it expects to keep rates at zero and continue with its asset purchases "until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals."

Separately, the Fed also announced on Wednesday extensions of its temporary U.S. dollar liquidity swap lines and the temporary repurchase agreement facility for foreign and international monetary authorities (FIMA repo facility) through March 31, 2021.

That followed a separate statement on Tuesday that the central bank is extending its lending programs to businesses, governments and individuals until the end of the year. They had been set to expire Sept. 30.

While the Fed's moves remain a focal point for markets, investors are more focused on what type of stimulus package Congress can agree to. So far Senate Republicans have proposed an additional $1 trillion in stimulus that includes enhanced unemployment benefits set to expire at the end of this week.