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US Fed keeps rates near zero, warns of COVID-19 resurgence

DM Monitoring

WASHINGTON: The U.S. Federal Reserve on Wednesday kept its benchmark interest rate unchanged at the record-low level of near zero while warning that a recent resurgence in COVID-19 cases nationwide is starting to weigh on economic recovery. “The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term,” the Fed said in a statement after concluding a two-day policy meeting.
The central bank expects to maintain the target range for the federal funds rate at 0-0.25 percent “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals”, according to the statement.
The Fed cut interest rates to near zero at two unscheduled meetings in March and began purchasing massive quantities of U.S. treasuries and agency mortgage-backed securities to repair financial markets. It also unveiled new lending programs to provide up to 2.3 trillion U.S. dollars to support the economy in response to the coronavirus outbreak.
A notable change since the Fed’s last meeting in early June is that coronavirus infection rates have accelerated in many U.S. states and at least 22 states have either paused or partially reversed their efforts to reopen their economies. “Indeed we have seen some signs in recent weeks in the renewed measures to control it are starting to weigh on economic activity,” Fed Chairman Jerome Powell said Wednesday afternoon at a virtual press conference, adding some measures of consumer spending based on debit and credit card use have dropped since late June.
“The path forward for the economy is extraordinarily uncertain and will depend on our success in keeping the virus in check,” Powell said, noting a full U.S. economic recovery is unlikely until people are confident that it’s safe to reengage in a broad range of activities.
“Even with the improved economic news in May and June, overall activity remains well below its level before the pandemic and the contraction in real GDP (gross domestic product) in the second quarter will likely be the largest on record,” said the Fed chief. Official statistics showed that the U.S. real GDP contracted at an annual rate of 5 percent in the first quarter this year, and the Commerce Department is scheduled to report its first estimate of the second quarter GDP on Thursday.
“Absent an easing of the pandemic, or the development of a vaccine in the near term, there is a real risk that the domestic economic rebound will continue to stall, creating the conditions for another downturn,” Joseph Brusuelas, chief economist at accounting and consulting firm RSM US LLP, wrote Wednesday in an analysis.
“Yet the Federal Reserve chose to hold its fire and provided no further accommodation at its July meeting even though companies have not been recalling as many workers and household consumption has slowed as the pandemic intensified in June and July,” he argued.
Brusuelas expected the Fed to announce a shift in the policy regime toward “an average inflation targeting” in its September meeting, which has put downward pressure on longer-term interest rates over the past week in anticipation of such a move following the 18-month review of central bank policy.

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