Fed announces interest rates will remain close to zero through 2022On June 11, 2020 by Mathias Belayneh
During yesterday’s press conference, Federal Reserve chairman Jerome Powell made it clear that the United States’ central bank will continue to apply stimulus to its economy until its severely damaged labour market has recovered from the impact of the coronavirus.
He stated the Federal Open Market Committee “aren’t even thinking about thinking about raising rates”, with the committee keeping interest rates near zero and officials predicting this will remain the case through to the end of 2022.
In its press release, the Fed’s statement stated that “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.”
Policymakers are forecasting the unemployment rate to fall to 9.3% in 2020, which is significantly higher than the projection of 3.5% made just a few months ago in December. This unemployment figure is expected to decrease to 6.5% next year. GDP, on the other hand, will supposedly see a contraction of 6.5% before rebounding to 5% in 2021.
The FOMC did say it would increase the amount of mortgage-backed securities and treasuries it holds to maintain smooth market functioning “at least at the current pace.” Currently, the Fed is buying around $10 billion in mortgage-backed securities and $20 billion in treasuries a week.
There were also discussions of the possibility that the central bank may adopt yield curve control – which is an approach which involves setting a treasury yield target for a particular bond maturity and carrying out an unlimited amount of buying/selling to reach this target. Powell said there would be further talks about this in future meetings.
Shortly after the release, US Sovereign debt rose, with the 10-year treasury yield falling to its lowest point this week, at 0.72%. This is likely due to bullish bond investors who were content with interest rates staying near zero for longer, as well as the extra support pledged for treasuries, and so carried on their bond buying spree.
US stocks, on the other hand, have plunged.
Paul O’Connor, Head of Janus Henderson’s Multi-Asset Team, stated that “Equities are selling off despite the Fed, not because of the Fed” and that “market sentiment has soared alongside the recent rally in stocks”, but it does seem like investors are pulling back as valuations start to become stretched.
The sell-off also comes as there are concerns over a second wave of coronavirus cases in the United States, as new infections has led the count to over 2 million Americans. On Wednesday, Texas reported 2,504 new cases which is the highest one day number since COVID-19 emerged there and Florida saw it’s highest weekly count of new cases at 8,553.
At the time of writing, the S&P 500 index is down 4.00% at 3,062.78 and the NASDAQ is down 3.22% at 9,696.05.
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