Federal Reserve Will Keep Rates Near Zero Until 2022 As Recession Continues

TOPLINE

The Federal Reserve left rates unchanged on Wednesday and indicated that they’ll likely remain near zero until at least 2022 as the economy tries to recover from the coronavirus recession.

The central bank expects the economy to shrink by 6.5% this year.

Jacquelyn Martin/ASSOCIATED PRESS

KEY FACTS

The Fed painted a grim view of the economy and said it would recover over the course of a few years: Unemployment will fall to 9.3% by the end of 2020—down from over 13% in May—and to 6.5% by the end of 2021, the Fed projected.

The Fed sees the economy contracting 6.5% this year, before rebounding somewhat and growing 5% in 2021.

The central bank also committed to maintaining its unprecedented stimulus plan until the economy has “weathered” the negative impact of the coronavirus pandemic.

The Fed promised not to reduce the pace of its quantitative easing as it plans to increase holdings of Treasury and mortgage-back securities over the coming months; it pledged to continue its extensive bond buying programs, “at least at the current pace” for the foreseeable future.

The Fed has so far enacted a slew of emergency initiatives including rate cuts, lending programs and credit facilities that have investors reassurance amid the coronavirus pandemic.

Some of the Fed’s emergency programs—like Main Street lending and corporate bond buying—are yet to be launched, though their announcements have helped calm markets and shore up investor confidence.

“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 Federal Reserve said in a statement.

Crucial quote

“We are not even thinking about thinking about raising rates,” Federal Reserve chairman Jerome Powell confirmed. “There is great uncertainty about the future,” he said, reiterating that the central bank is strongly committed to doing “whatever we can, for as long as it takes” to help support the economy. “We’ve been very willing to adapt and will continue to be,” he said. “When the time comes, after the crisis has passed, we will put emergency tools back in the toolbox.”

Chief critic

“Powell’s tone on the underlying economy remains cautious and while he welcomed the May jobs report, he notes the enormous damage still lying in the wake of COVID-19,” according to Vital Knowledge founder Adam Crisafulli. Powell’s message on growth is “much more cautious than the current market narrative,” he warns.

Tangent

“The Fed understands we are just in the beginning phases of the economic recovery and making rash changes to policy or forward guidance is premature at this time,” says Charlie Ripley, senior investment strategist for Allianz Investment Management. “As the economic recovery continues to take shape we expect monetary accommodation to be slowly trimmed back and better guidance around that should evolve in the coming months.”

Key background

Stocks rallied after the Fed’s announcement, as Wall Street cheered optimism about an economic recovery. The Fed’s unprecedented intervention to support the economy is a crucial factor lifting stocks in 2020: The Central Bank has injected nearly $3 trillion into financial markets since the end of February. Earlier this week, the tech-heavy Nasdaq hit a new record high and the S&P 500 turned positive for the year, fully recouping its losses from the coronavirus pandemic.