The Federal Reserve left its policy rate steady at essentially zero as it forecast an economic contraction this year while it repeated its guidance from April that it “expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goal.”
The central bank for the United States kept its target range for the federal funds rate at 0.0 to 0.25 percent, unchanged since two rapid-fire rate cuts totaling 150 basis points in early March.
As in April, the Fed said the coronavirus 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.”
In the first update to its economic projection since December last year, before the Covid-19 pandemic led to a shutdown of the global economy, the Fed slashed its growth forecast for this year to a contraction of 6.5 percent, down from an earlier forecast for growth of 2.0 percent.
Next year the U.S. economy is seen bouncing back, with growth of 5.0 percent and then 3.5 percent in 2022.
Reflecting the hit to economic growth and lower inflation, the Fed projected the fed funds rate would remain at its current level of 0.1 percent through 2022 as inflation remains below its target in the same period while unemployment only slowly declines.
The normal update to economic projections in March was skipped amid the growing uncertainty surrounding the impact of the coronavirus on the economy.
The sudden halt to global economic activity to curb the spread of the virus not only triggered the rate cuts in March, but also a pledge by the Fed of unlimited amount of government bonds purchases, the launch of a flurry of new funding facilities and the injection of trillions of dollars into financial markets to ensure they operated smoothly.
“To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions,” the Fed’s policy-making body, the Federal Open Market Committee (FOMC) said in a unanimous statement.
Among the lending facilities the Fed launched in March were the Commercial Paper Funding Facility (CPFF), the Primary Market Corporate Credit Facility (PMCCF), the Secondary Market Corporate Credit Facility (SMCCF), the Term Asset-Backed Securities Loan Facility (TALF) and the Money Market Mutual Fund Liquidity Facility (MMLF).
Internationally, the Fed was also busy ensuring the availability of U.S. dollars, establishing temporary U.S. dollar swap lines with a series of central banks abroad, such as the central bank of Brazil and Norway on top of its existing swap lines with the major central banks of the world, including Canada, the UK, the ECB, Switzerland and Japan.
In April the Fed added to its loan facilities through the Paycheck Protection Program (PPP), the Main Street lending program and the Municipal Liquidity Facility (MLF) while the Fed in May announced it would begin buying exchange-traded funds (ETFs) that include U.S. corporate bonds.
As other economies around the world, the U.S. economy has been hit hard by measures to curb the spread of the Covid-19 virus and this week the National Bureau of Economic Research, which tracks economic cycles in the U.S., this week said the U.S. officially entered a recession in February, ending a 128-month expansion, the longest since records began in 1854.
The OECD, the Paris-based international economic organization of developed economies, earlier today released its latest outlook for the global economy, saying the pandemic has triggered “the most severe economic recession in nearly a century,” with the U.S. economy shrinking by 7.3 percent even if a second wave of the virus is avoided and by 8.5 percent if a second wave takes hold.
In the first quarter of this year, the U.S. gross domestic product contracted an annualized 5.0 percent in the first quarter from the previous quarter for annual growth of only 0.23 percent, down from 2.3 percent in the fourth quarter of last year.
Inflation in the U.S. has decelerated sharply in recent months, reflecting the fall in crude oil prices and energy, with headline consumer prices up only 0.1 percent in May from last year, down from 0.3 percent in April, well below the Fed’s target of 2.0 percent.
The Fed forecast inflation, as measured by its favored personal consumption expenditure index, will average 1.0 percent this year, then 1.6 percent in 2021 and 1.7 percent in 2022 while the unemployment rate will average 9.3 percent this year, then 6.5 percent in 2021 and 5.5 percent in 2022.
The Board of Governors of the Federal Reserve System released the following statement:
