Fed vows to maintain bond-buying until 'substantial progress' in recovery

FILE PHOTO: Federal Reserve Board building on Constitution Avenue is pictured in Washington, U.S., March 19, 2019. REUTERS/Leah Millis/File Photo

(Reuters)


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WASHINGTON (Reuters) — The Federal Reserve on Wednesday promised to keep funneling cash into financial markets further into the future to fight the recession, even as policymakers' outlook for next year improved following the initial rollout of a coronavirus vaccine.

Repeating a pledge to keep its benchmark overnight interest rate near zero until an economic recovery is complete, the U.S. central bank said it would also now tie its program of monthly government bond purchases to that same goal.

"Together, these measures will ensure that monetary policy will continue to deliver powerful support to the economy until the recovery is complete," Fed Chair Jerome Powell said in a news conference after the end of the central bank's latest policy meeting.

The bond purchases would continue "until substantial further progress has been made toward the Committee's maximum employment and price stability goals," the Fed's rate-setting committee said in its unanimous policy statement.

It was the more incremental step of the options the Fed was weighing, taken as policymakers boosted their outlook for U.S. economic growth next year to 4.2% from 4% at the median, and lowered the expected year-end unemployment rate to 5% from 5.5%.

With the economic landscape in 2021 brightening, the Fed did not change the type or pace of assets being purchased, a step many analysts had expected as a way for it to provide more immediate help to the economy in the months that it will take for the impact of vaccines to be felt.

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The language does for the first time however link its $120 billion in monthly purchases of U.S. Treasury bonds and government-backed securities to a set of economic conditions. It had previously pledged to make those purchases only "over coming months," with no firm guidance about when the recession-fighting program might stop.

"We had expected perhaps an extension of the maturities of the asset purchases. They didn't do that," said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics. "But this guidance, forward guidance on QE (quantitative easing) is pretty powerful ... that gives some clarity, which is good."

U.S. stocks, up slightly ahead of the Fed's statement, pared their gains and were mixed in mid-afternoon trading. Benchmark U.S. Treasury security yields ticked higher, and the dollar edged up against major trading partner currencies.

Stimulus negotiations

The conclusion of the Fed's last policy meeting of 2020 capped a tumultuous year in which it slashed interest rates, ramped up bond purchases and took other extraordinary measures to stem the economic carnage of the coronavirus pandemic.

Fed officials, however, have urged the federal government in recent months to step in with more pandemic-related relief to bolster the economic recovery at a time when a surge in COVID-19 infections has led to more lockdowns and restrictions on businesses across the country.

U.S. retail sales fell more than expected in November, the Commerce Department reported on Wednesday, data that added to growing signs of a slowdown in the economic recovery.

More than 304,000 people in the United States have died from COVID-19 since the start of the pandemic, according to a Reuters tally.

Lawmakers in Congress on Wednesday were "closing in on" a $900 billion COVID-19 aid bill that would include $600 to $700 stimulus checks and extended unemployment benefits. Barring more aid from Washington, millions of unemployed Americans were slated to lose unemployment benefits the day after Christmas.

Powell told reporters that despite some progress in the economic recovery and unemployment rate, the pace of improvement is slowing and the share of people who are either working or looking for work remains below pre-pandemic levels.

"Although there has been much progress in the labor market since the spring, we will not lose sight of the millions of Americans who remain out of work," he said.

(Reporting by Howard Schneider; Additional reporting by Karen Pierog in ChicagoEditing by Paul Simao)

© Copyright Thomson Reuters 2020

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