Good news, borrowers: Fed is forecasting no rate hike through ’22
WASHINGTON (AP) — Confronted with an economy gripped by recession and high unemployment, the Federal Reserve made clear Wednesday that it will keep supplying all the help it can by buying bonds to maintain low borrowing rates and forecasting no rate hike through 2022.
The Fed has cut its benchmark short-term rate to near zero. Keeping its rate ultra-low for more than two more years could make it easier for consumers and businesses to borrow and spend enough to sustain an economy depressed by still-widespread business shutdowns.
Stock prices rallied modestly on the news after having been mainly lower before the Fed issued its latest policy statement.
The central bank noted in the statement after its policy meeting ended that the viral outbreak has caused a sharp fall in economic activity and a surge in job losses. Fed officials estimate that the economy will shrink 6.5 percent this year, in line with other forecasts, before expanding 5 percent in 2021. They foresee the unemployment rate at 9.3 percent, near the peak of the last recession, by the end of this year. The rate is now 13.3 percent.
The Fed also specified that it will buy $80 billion of Treasury securities a month and $40 billion in mortgage-backed securities. The central bank has been slowing its purchases from as high as $375 billion a month in March. But this is the first time that the Fed has indicated the size of the purchases it will pursue in the coming months.
At a virtual news conference Wednesday afternoon, Chairman Jerome Powell is expected to drive home the message that the economy remains in need of extraordinary help despite recent despite glimmers of a possible recovery, including a government report Friday that employers surprisingly added jobs in May.
Since March, the Fed has slashed its benchmark short-term rate, bought $2.1 trillion in Treasury and mortgage bonds to inject cash into markets, and rolled out nine lending programs to try to keep credit flowing smoothly. Most analysts expect the Fed to pause and assess the economic landscape before embarking on any further actions, which could come at September’s meeting.
The Fed’s actions are credited with having helped fuel an extraordinary rally in the stock market, which has nearly regained its prepandemic high after a dizzying plunge in March.
And by committing to buy corporate bonds, thereby reinvigorating the market for such securities, the Fed has also ensured that corporations can continue to borrow. Its initiatives also include a first-ever program through which the Fed is buying state and local government debt to support the municipal bond market.
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