The Strategist

US Fed keeps rate unchanged, aims to support the economy

06/11/2020 - 08:01

Following the results of the planned June meeting, the US Federal Reserve System (FRS) left the key rate at 0-0.25% per annum. At the same time, the regulator promised to use the “entire set of support measures” and continue to repurchase bonds at least in current volumes - pointing to medium-term risks for the economy. In the updated macro forecast, the Fed expects a decrease in US GDP by 6.5% this year and an increase in unemployment to 9.3%.

Following the June meeting, the US Federal Reserve Open Market Committee expectedly refrained from changing the rate, after in March it urgently reduced it to the level of 0-0.25%. At the same time, the regulator promised to use the entire set of measures to maintain employment and price stability, as well as to continue to buy assets in the volumes necessary to maintain the effective functioning of the market. In the coming months, the repurchase will occur at least in current volumes (about $ 80 billion for the purchase of government bonds and $ 40 billion for mortgage securities).

In a statement, the Fed pointed to a sharp decline in business activity and employment, as well as the fact that lower oil prices put pressure on inflation (while conditions in the financial markets improved). The current crisis carries significant risks for the US economy in the medium term, the regulator said.

Against the background of accelerated growth in the required yield on government bonds with long maturities, market participants expected the Fed to announce yield targeting, but this was not in the statement.

The scatter chart with rate forecasts from members of the Fed committee now does not imply its increase until the end of 2022. Recall that the regulator has already made three decisions on additional measures to support the US economy against the backdrop of the fight against the novel coronavirus - at first the rate was reduced and additional short-term liquidity was provided, and in late March, the committee promised for the first time to use the “whole set of measures”, removing the restriction on the amount of assets repurchased. In addition, large-scale programs of concessional lending to businesses were initiated, their volume was expanded to $ 2.3 trillion (approximately 10% of US GDP). Congress also approved several comparable fiscal measures of support (in late March - by $ 2.2 trillion, in May - by $ 483 billion).

According to the updated macro forecast, the US economy will fall 6.5% this year (an increase of 5% in 2021 and 3.5% in 2022).

Inflation (net of energy and food) should grow by 0.8% (1.6% and 1.7%). The unemployment forecast for this year has been sharply raised - up to 9.3% (6.5% in 2020, 5.5% in 2021). Meanwhile, recent data from the US Department of Labor showed that unemployment in the country in May fell to 13.3% from a record 14.7% in April. In May, 2.5 million jobs were created, while they were projected to decrease by 7.5 million, according to Capital Economics.

According to the results of the first quarter of this year, US GDP fell by 4.8% compared to the same period of the past, which is the worst decline since the fourth quarter of 2008. According to NBER estimates, in February the USA completed the business expansion cycle, which began in June 2009.