US Central Bank Vows To Buy Bonds Until Substantial Economic Progress

The Federal Reserve on Wednesday vowed to keep funneling cash into financial markets until the U.S. economic recovery is secure, a promise of long-term help that fell short of hopes of an immediate move to shore up a recent pandemic-related slide. Following a policy meeting that took stock of both the short-term risks to the economy and the new promise of a coronavirus vaccine, Fed Chair Jerome Powell acknowledged the U.S. central bank’s suite of tools is not well-suited to the most pressing needs faced by households and businesses today. “The parts of the economy that are weak are the service-sector businesses that involve close contact,” such as restaurants and the travel industry, Powell said in a news conference following the two-day meeting.

“Those are not being held back by financial conditions, but rather by the spread of the virus” that is now intensifying across the country, he said. Unemployed households or struggling businesses are more in need of immediate cash, Powell added, something top lawmakers in Congress were working to provide in talks towards a new $900 billion pandemic relief bill.

For the Fed, the more relevant horizon is the middle of next year, when Powell said the central bank is hopeful the country may approach widespread immunity from the coronavirus, and see economic activity surge. “The issue is the next four, five, six months,” Powell told reporters. “You have to think some time in the middle of next year you will see people feeling comfortable going out engaging in a broader range of activities.”

His comments seemed to diminish what some market analysts had taken as a given – that the Fed would at some point either increase the pace or type of government bonds it is buying currently at a rate of $120 billion per month. But the rollout of a vaccine in the United States has added to hopes the economy may continue pulling steadily out of a recession that began in March and which had elicited talk of a second Great Depression.

In quarterly projections issued along with the policy statement, Fed officials boosted their outlook for the economy’s performance this year and in 2021. They now see just a 2.4 per cent hit to gross domestic product in 2020 – compared to projections in June of a 6.5 per cent gash. GDP growth next year is projected to be 4.2 per cent at the median, instead of the 4 per cent projected in September. Policymakers also lowered their expected year-end unemployment rate for 2021 to 5 per cent from 5.5 per cent.

With interest rates anchored at zero likely for years to come, the Fed added a more explicit promise to continue the current bond-buying program until there is “substantial further progress” in restoring full employment and hitting its 2 per cent inflation target. Between those two props for the economy, “our current policy stance is appropriate,” Powell said, while adding that the Fed would consider altering its bond purchases if economic conditions changed.

The vote on the policy statement was unanimous, and for the first time links the Fed’s monthly purchases of U.S. Treasury bonds and government-backed securities to a set of economic conditions. It had previously pledged to make those purchases only “over coming months,” with no firm guidance about when the recession-fighting program might stop.