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Fed Maintains Stimulus Commitment as Economic Outlook Dims

The Federal Reserve said the U.S. economy faced major challenges from the coronavirus pandemic and reiterated its pledge to take aggressive action to support an eventual recovery.

“The path of the economy will depend significantly on the course of the virus,” officials said in a statement released after the conclusion of their policy meeting on Wednesday.

“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 statement said.

The officials have been weighing how to provide more support to the economy after moving quickly this spring to cut interest rates to near zero, to ramp up purchases of government debt and to establish an array of emergency lending programs to stabilize funding and credit markets.

The economic backdrop has changed notably since the Fed’s rate-setting committee last met seven weeks ago — mostly for the worse. After surprising rebounds in employment in May and June, many states have seen significant increases in virus infections, leading to renewed curbs on certain commercial activities and a dampening of consumer confidence.

“We have seen some signs in recent weeks that the increase in virus cases and the measures taken to control it are starting to weigh on economic activity,” said Fed Chairman Jerome Powell in a news conference conducted virtually after the meeting Wednesday.

A new virus-relief bill that is the subject of deliberations between lawmakers and the White House could further reshape the outlook.

Fed officials have focused their recent comments on tools beyond their control, including the imperative of suppressing the virus by more aggressively adopting social-distancing measures, including wearing masks — and by boosting the capacity to test, trace and isolate known infection cases.

They have also called attention to the need for Congress and the White House to preserve income for unemployed workers and to support businesses and state and local governments facing sharp drops in revenues due to the pandemic.

Fed officials face three related deliberations over how to provide more stimulus. The first concerns describing how long the Fed plans to keep interest rates near zero and continue buying Treasurys and mortgage bonds. The second centers on whether to commit to an open-ended stimulus program with those purchases, which could also skew toward longer-dated securities, as officials did after the 2008 financial crisis. The third entails concluding a yearlong review of the Fed’s long-run policy-setting strategy.

The Fed already has provided a measure of so-called forward guidance with projections last month that showed most officials don’t anticipate lifting rates for years. Mr. Powell said in June the central bank is “not even thinking about thinking about raising rates.”

Discussions right now are focused on how to tie their stimulus promises to inflation and unemployment benchmarks. Officials must decide whether to tie their guidance to both or instead rely more heavily on an inflation goal, since inflation has for years run below their 2% target. Over the past five years, unemployment fell to lower-than-predicted levels, but higher inflation didn’t materialize as forecast.

Since mid-June, the Fed has been buying $80 billion in Treasurys a month and $40 billion in mortgage bonds, net of redemptions. But they are considering how to pivot from a program focused primarily on stabilizing markets toward one that provides stimulus. They have bought $2.5 trillion in assets since March.

Officials are resuming a yearlong review of the Fed’s long-run policy-setting strategy, which could further complement their broader strategy. Before the pandemic hit, officials were close to agreeing on an important change to their formal statement of long-run goals. The change would effectively abandon the Fed’s longtime strategy of always raising rates pre-emptively to prevent inflation from rising above its 2% target.

Instead, officials would allow inflation to average 2% over time. This means periods of inflation below that level would be followed by periods in which they allow inflation to exceed it. The Fed currently doesn’t take past performance of inflation into account.
Source: Dow Jones

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