The Federal Reserve strengthened its commitment to support the U.S. economy, promising to maintain its massive asset purchase program until it sees “substantial further progress” in employment and inflation.
At their final meeting of a tumultuous year, policy makers led by Chair Jerome Powell on Wednesday voted to maintain monthly bond purchases of at least $120 billion and scrapped their previous pledge to keep buying “over coming months.”
They didn’t announce changes to the composition of purchases in their statement, declining to shift them toward longer-term maturities as some economists had recommended.
Powell called the new language on asset purchases “powerful,” but declined to specifically define what inflation and unemployment rates would trigger a future change in the buying campaign.
“I can’t give you an exact set of numbers,” he told reporters during a press conference to explain the decision. He added the point at which the economy might meet these conditions was “some ways off.”
Ten-year Treasury yields initially rose after the statement was released to trade at about 0.94% but prices rallied as Powell spoke and yields ended the New York session only slightly higher on the day at around 0.92%. The S&P 500 rose a touch on speculation that a new fiscal stimulus deal was close.
The Fed meeting came as lawmakers on Capitol Hill tried to wrap up an agreement on fresh aid after months of deadlock, with both fiscal and monetary policy poised to help continue cushioning an increasingly shaky economy during the wait for widespread vaccine distribution.
“The Fed marked up growth in each of the next two years, marked down unemployment, and market up core inflation. Despite this, they don’t expect to move rates. Good for risk appetite. Buy stocks,” said Neil Dutta, head of U.S. economic research at Renaissance Macro Research.
The Federal Open Market Committee said “economic activity and employment have continued to recover but remain well below their levels at the beginning of the year.” Its quarterly projections for the economy showed some improvement compared with September.
The committee unanimously kept the federal funds target rate in a range of zero to 0.25%, where it’s been since March, and a majority of Fed officials continued to forecast that their benchmark lending rate would be held near zero at least through 2023.
The FOMC “expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time,” policy makers said, repeating language from their November statement.
Powell said the next several months will be challenging, noting that many people are still lining up for food and some small businesses are struggling to hold on.
“Now that we can kind of see the light at the end of the tunnel, it would be bad to see people losing their businesses, their lives’ work in some cases,” because they “couldn’t last another few months, which is what it amounts to,” Powell said.
The central bank’s meeting builds on their earlier response to the coronavirus pandemic, in which officials cut interest rates to near zero while unleashing massive bond purchases and a multitude of emergency lending programs.
U.S. central bankers are still far away from their goals, and Powell has repeatedly called on Congress to pass another round of fiscal stimulus to help the economy through the winter as the pandemic continues to rage. The unemployment rate stood at 6.7% in November, while inflation remains below 2%.
Even so, financial markets have been buoyed by investors counting on steady growth next year as more people are vaccinated, as well as pent-up consumer demand, low interest rates and maybe another round of fiscal stimulus. The S&P 500 index set a record high earlier this month, while yield spreads on corporate bonds are trading around pre-pandemic lows.
Despite the ebullience in markets, non-farm payroll growth slowed to 245,000 in November -- less than half the gain in October -- and employment is still down roughly 10 million compared with before the virus struck. U.S. retail sales dropped by more than forecast in November and the prior month was revised to a decline, the first drops since March and April, data showed earlier Wednesday.
Updated Projections
The Fed’s quarterly projections showed some improvement compared with September. Here are some highlights:
—Gross domestic product: Down 2.4% in 2020 (prior estimate was 3.7% contraction); 4.2% growth in 2021
—Fourth-quarter unemployment rate: 5.0% in 2021 (prior estimate 5.5%), 4.2% in 2022
—PCE inflation: 1.8% in 2021 (prior estimate 1.7%), 1.9% in 2022
—Longer-run federal funds rate: 2.5%, unchanged from prior projection of 2.5%
(With assistance by Jeff Kearns, Matthew Boesler, Liz McCormick, Steve Matthews, Catarina Saraiva, and Christopher Condon)
