Fed’s Powell Pledges Long-Term Support for Economy
Underscoring the rollout of a COVID-19 vaccine won’t fix the economy overnight, Federal Reserve Chairman Jerome Powell pledged Wednesday that the central bank would provide long-term support to the U.S. economy as it attempts to build a bridge over the pandemic’s “economic chasm.”
"We have more we can do,” Powell said during an online press conference after the December meeting of the Federal Reserve’s Federal Open Market Committee (FOMC). “We are going to need to continue to provide support to this economy for quite a period of time."
While this month’s emergency approval of a COVID-19 vaccine was a critical turning point in the trajectory of the economic recovery, the country continues to reel from the shock of the pandemic. The U.S. economy still has 9.8 million fewer jobs than it did before the crisis, and job growth has slowed dramatically as cases of the virus surge. The central bank, aiming to get the economy back to full employment and a 2% inflation rate over the long term, relies on its tools of targeting interest rates and funneling money into financial markets to get there.
The FOMC pledged to continue to support financial markets by increasing its holdings of Treasurys and mortgage-backed securities. Notably, the committee will continue to purchase at least $120 billion a month “until substantial further progress” has been made toward restoring the job market, according to a FOMC statement. At its previous meeting, the committee had only said it would do so over the “coming months.”
While the FOMC’s wording leaves room for interpretation, it “certainly suggests that they’re not going to pull back anytime soon,” said Scott Hoyt, senior director for Moody’s Analytics.
The Fed, however, held back one weapon in its arsenal: It declined to commit to purchasing more longer-maturity securities, despite some speculation that it might do so. Such a move would have put downward pressure on long-term interest rates for loans such as mortgages, Hoyt said. Moody’s noted an immediate rise in long-term rates after the statement.
Powell said the FOMC decided not to take more aggressive steps because the parts of the economy that are sensitive to interest rates, namely housing and vehicle sales, were doing well. The struggling parts of the economy, he said, “are not being held back by financial conditions, but by the spread of the virus.”
However, Powell didn’t rule out changing the mix of securities purchases in the future. "We do have the ability to buy more bonds or to buy longer-term bonds and we may well use that," he said.
The committee didn’t alter course at all on benchmark interest rates, saying it would continue to target a federal funds rate of virtually zero through 2023.
Powell said while the Fed would continue to provide support where it could, there was a “very strong” case for more fiscal support from Congress as several aid programs are set to expire just as the pandemic is getting worse.
“With the expiration of unemployment benefits … the expiration of eviction moratoriums with the virus spreading the way it is, there is a need for businesses and households to have fiscal support,” he said.