WASHINGTON – Confronted with an economy gripped by recession and high unemployment, the Federal Reserve made clear Wednesday that it will keep supplying all the help it can by buying bonds to maintain low borrowing rates and forecasting no rate hike through 2022.
The Fed has cut its benchmark short-term rate to near zero. Keeping its rate ultra-low for more than two more years could make it easier for consumers and businesses to borrow and spend enough to sustain an economy depressed by still-widespread business shutdowns from the coronavirus.
Stock prices initially rallied modestly after the Fed issued its latest policy statement at 2 p.m. wbefore falling back into negative territory.
In the statement, which followed its latest meeting, the Fed also credited its emergency lending programs for reviving the flow of credit to households and businesses, after markets had locked up in March when investors sold a range of securities to boost their cash holdings.
The central bank noted in its statement that the viral outbreak has caused a sharp fall in economic activity and surge in job losses. Fed officials estimate that the economy will shrink 6.5% this year, in line with other forecasts, before expanding 5% in 2021. They foresee sees the unemployment rate at 9.3%, near the peak of the last recession, by the end of this year. The rate is now 13.3%.
The Fed also specified that it will buy $80 billion of Treasury securities a month and $40 billion in mortgage-backed securities. The central bank has been slowing its purchases from as high as $375 billion a month in March. But this is the first time that the Fed has indicated the size of the purchases it will pursue in the coming months.
At a virtual news conference, Chairman Jerome Powell acknowledged the widespread protests in the aftermath of George Floyd’s killing that have called attention to racial injustices.
“I want to acknowledge the tragic events that have put a spotlight on (issues of racism),” Powell said. “There is no place at the Federal Reserve for racism, and there should be no place in our society.”
The chairman stressed that the economy remains in need of extraordinary help despite recent despite glimmers of a possible recovery, including a government report Friday that employers surprisingly added jobs in May.
Since March, the Fed has slashed its benchmark short-term rate, bought $2.1 trillion in Treasury and mortgage bonds to inject cash into markets and rolled out nine lending programs to try to keep credit flowing smoothly. Most analysts expect the Fed to pause and assess the economic landscape before embarking on any further actions, which could come at September’s meeting.