The Fed’s Commitment to Supporting the Economy
In a statement released on Wednesday, the Federal Reserve announced its decision to continue supporting the economy through massive monetary stimulus until it sees "substantial further progress" in employment and inflation. This move was widely expected by market analysts, but its implications for the US economy are significant.
The Fed’s Decision to Maintain Bond Purchases
The Federal Open Market Committee (FOMC) voted to maintain monthly bond purchases of at least $120 billion, with no changes to the composition of purchases. This means that the Fed will continue to purchase Treasury securities by at least $80 billion per month and agency mortgage-backed securities by at least $40 billion per month until it sees substantial progress toward its goals.
The Fed’s Goals for Employment and Inflation
The FOMC emphasized its commitment to achieving maximum employment and price stability. It stated that "economic activity and employment have continued to recover but remain well below their levels at the beginning of the year." To achieve its goals, the committee expects it will be appropriate to maintain the target range until labor market conditions have reached levels consistent with its assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time.
Powell’s Press Conference
Federal Reserve Chairman Jerome Powell is scheduled to hold a video press conference at 2:30 p.m. Washington time, where he will likely provide further insights into the Fed’s decision-making process.
Market Implications
Financial markets have been buoyed by investors counting on steady growth next year as more people are vaccinated, as well as pent-up consumer demand, low interest rates, and maybe another round of fiscal stimulus. However, despite this optimism, non-farm payroll growth slowed to 245,000 in November, and employment is still down roughly 10 million compared with before the virus struck.
The Role of Fiscal Stimulus
Powell has repeatedly called on Congress to pass another round of fiscal stimulus to help the economy through the winter as the pandemic continues to rage. The unemployment rate stood at 6.7% in November, while inflation remains below 2%.
Conclusion
The Fed’s decision to maintain bond purchases is a testament to its commitment to supporting the US economy during these challenging times. While financial markets are optimistic about steady growth next year, the underlying economic data suggest that there is still much work to be done.
Additional Resources
- Bank of Canada’s Macklem sees economy entering ‘difficult stage’
- Bank of Canada opens door to another rate cut — but not one below zero
- Digital cash may seem inevitable, but the Bank of Canada isn’t quite ready to concede
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