Fed to Keep Rates Steady Until Economy Has Weathered Covid-19 Storm

By Yasin Ebrahim 

Investing.com – The Federal Reserve held rates steady on Wednesday as expected, but signaled it would stick with ultra-loose monetary policy measures until the economy has weathered the Covid-19 economic storm. 

The Federal Open Market Committee left its benchmark rate unchanged in the range of 0% to 0.25%, and said it would keep rates within the current range until the economy has moved on from the Covid-19 crisis and is on track to meet the central bank's targets.

"The committee 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 goals," the Fed said Wednesday following the conclusion of its two-day meeting.   

"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," it added.

The central bank said it would assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2% inflation objective to determine the timing and size of future adjustments to monetary policy.

The Fed pledged to continue purchasing Treasury securities and agency residential and commercial mortgage-backed securities in the "amounts needed to support smooth market functioning," to support the flow of credit to households and businesses.

In a virtual press conference that followed the monetary policy statement, Fed Chairman Jerome Powell said the current stance of monetary policy remained appropriate, but conceded that the central bank and Congress will likely need to roll out further stimulus to ensure an eventual economic recovery is robust.     

The unchanged decision comes as the central bank, in two unscheduled meetings on March 3 and March 15, cut its benchmark rate by 50 basis points and 100 basis points respectively, to a range of 0% to 0.25%.

It was the first time on record that the central bank had cut rates on two separate occasions between scheduled meetings.

The central bank also resumed its financial crises era quantitative easing program, pledging to purchase $700 billion in Treasury and mortgage-backed securities to avert a financial crisis.

"We have responded very strongly not just with interest rates but also with liquidity measures today," Fed Chairman Jerome Powell said during a press conference on March 15.

But fears of a liquidity squeeze persisted, forcing the Fed into bigger and bolder action across markets, including short-term lending markets, currencies and corporate credit. 

Over a three-day period from March 15, the Fed pumped $1.5 trillion into repo, or repurchase agreement, markets to ease cost of short-term borrowing, put $1.1 trillion into the commercial-paper market to calm credit worries, doled out $4 trillion in emergency aid to mutual funds and agreed with other central banks to create foreign-exchange swap lines to remedy dollar fund shortages.

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In the days that followed, the Federal Reserve continued to fire its bazooka, backstopping corporate credit markets and businesses.

In what was perhaps its boldest move, the U.S. central bank said it would buy unlimited amounts of Treasuries and mortgage-backed securities – a move that many said indicates the Fed will do whatever it takes to support the economy.

"The Federal Reserve is committed to using its full range of tools to support households, businesses, and the U.S. economy overall in this challenging time," Fed leaders wrote in a statement following the announcement.

Most recently, the Federal Reserve has joined forces with the government to help backstop the small business lending program, which was recently topped up by $320 billion as part of the latest stimulus bill.

The Fed's balance sheet has expanded to about $6.6 trillion so far, but some are calling for more action from the Fed amid worries over a protracted economic recovery.