Fed Leaves Interest Rates Near-Zero as Economic Recovery Slows

Federal Reserve officials left interest rates near-zero and pledged to continue making huge purchases of government-backed bonds as the central bank tries to help the United States economy weather the pandemic’s ongoing hit.“The pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic,” the central bank’s policy-setting Federal Open Market Committee said in its January policy statement.Fed Chair Jerome H. Powell, speaking at a news conference on Wednesday, said the resurgence of the virus was “weighing on economic activity and job creation,” and that the economic outlook hinges crucially on the pandemic itself.“The path of the economy continues to depend significantly on the course of the virus,” Mr. Powell said, adding that “the path ahead remains highly uncertain.”The Fed chair noted that household spending on services “remains low” but said that spending on goods — which had helped drive the recovery this summer — “has moderated.”The glum assessment shows that the Fed still sees the pandemic-stricken economy falling far short of its two major goals: maximum employment and price stability. Its officials are hoping that by keeping credit cheap, they can boost demand in the economy and help to set the stage for a job market recovery while also shoring up price gains, which have been chronically weak.Besides leaving interest rates at rock-bottom, where they have been since March 2020, the Fed is buying about $120 billion in government-backed bonds each month. While most investors expect the purchases to slow eventually, Mr. Powell has been clear that the economy remains far from the central bank’s targets, that officials are not yet ready to change course, and that they will broadcast it when they do see some change coming.Business & EconomyUpdated Jan. 27, 2021, 1:51 p.m. ET“It’s just too early to be talking about dates,” he said. “When we see ourselves getting to that point, we’ll communicate clearly about it.”Fed officials have repeatedly stressed that they are just one part of the economic response to this crisis, and that Congress — which has the power to spend and provide targeted relief — plays a central role in helping to support the economy. As the recovery began to slow last year and lawmakers struggled to agree on another aid package, Mr. Powell and other Fed officials said publicly that additional stimulus was needed to help families and workers stay afloat and to prevent longer-term economic scarring.In his first news conference since lawmakers passed a $900 billion stimulus package in December, Mr. Powell demurred when asked whether the economy needed another round of fiscal support, saying it was up to Congress and the Biden administration to make that decision.But the Fed chair suggested more might be needed, saying a “key reason” for the strength of the economic recovery so far was a “strong and sustained” fiscal response from lawmakers.“We’re a long way from a full recovery,” he said, noting that nine million people remain out of work and that “many small businesses remain under pressure.”President Biden has proposed a $1.9 trillion stimulus package, but his administration must prepare the fine details and steer the legislation through Congress. That could be a challenge, as some Republican lawmakers revive concerns over the nation’s fast-growing debt and even some Democrats express concerns about another large package.Together with congressional relief packages, the central bank’s low rates have helped the economy avoid an even deeper slump during the pandemic downturn so far, including by fueling a robust housing market. The Fed also rolled out a sweeping series of financial market rescue programs last year, several of which remain in place. Those helped to keep credit flowing during the worst of the pandemic-related market turmoil.Some analysts have warned that the Fed’s policies are putting financial stability at risk, pushing stock prices higher and causing investors to seek out ever-sketchier assets as they try to find investments that offer higher payouts.“While there is for now no alternative to continued monetary policy support, there are legitimate concerns around excessive risk-taking and market exuberance,” International Monetary Fund officials warned in a blog post on Wednesday. “With investors betting on persistent policy backstop, a sense of complacency appears to be permeating markets.”


Source link