- The US Fed is committed to using its policy tools to support the economy and maintain stable prices and maximum employment.
- Global environment continues to remain uncertain, owing to a range of possibilities, including a second wave of COVID-19 infections and delays in medical breakthrough.
- Fed funds rate was unchanged at this meeting.
- The Federal Reserve Board members expect the economy to contract between 10% to 4.2% this year and unemployment rate to come down to 7% at best.
In the US, on 10 June 2020, the Federal Reserve Board ended its two-day monetary policy review. The Board stated that it is committed to utilise all its tool to maintain price stability and maximum employment in the economy during the crisis.
The magnitude of economic dislocation caused by the pandemic is quite large, and the path to recovery depends on various factors, including effective control on virus transmission, a medical breakthrough.
Activities that require close contact are likely to remain in stress given the psychological impact of virus on households. It may take longer for people to freely roam in high streets, shop in a crowded store or go for an international vacation.
Few Countries off the Virus Hook
But some countries like New Zealand have proved that COVID-19 free destination may not be far provided that surrounding conditions are favourable. Likewise, Australia has also been largely successful in containing the spread of virus given it undertook proactive measures to limit community transmission.
Still, the countries are not immune to the possibility of second-wave of COVID-19 infections, which may force policymakers to impose restrictions on people movement. Since economic activity is resuming in Australia as well as around the world, the businesses are in a better place than they were three months ago.
The US Picture
In the US, the level of economic damage at the heart of the economy, which is the US consumer, has faced detrimental consequences as job losses mounted, taking unemployment rates to record high levels from record low levels in just a few months.
A high level of unemployment also means weaker demand, which combined with suppressed lower oil prices makes the cases for subdued inflation. Moreover, when stable prices and employment are out of track, it is likely that interest rate would be lower for longer.
If prices or employments picture were to raise concerns on the economic prosperity, interest rate hikes by the Federal Reserve could be waiting in the wings. However, economic prosperity or economic recovery is presently quite uncertain and delays in medical breakthrough pose considerable risk to recovery.
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The committee notes that financial conditions have eased, partially driven by policy measures and credit flows to business and households. They said that the crisis is impacting economic activity, jobs and prices, thereby adding risks to the economic outlook over the medium term.
As a result, the Board decided to keep Fed Funds Rate unchanged at 0%- 0.25%. It expects rates to remain within this range until economic conditions improve, and the economy is on track to create jobs amidst stable prices or acceptable inflation.
Federal Reserve Board members are inclined to support the economy through policy measures, and they will be monitoring incoming information, including global developments, inflation, and developments in public health.
Inflation target and maximum employment mandate would be crucial to determine the future adjustments in monetary policy measures. They continue to monitor labour markets, global financial conditions, indicators of inflation while assessing the stance of monetary policy.
Over the coming months, Federal Reserve will continue with quantitative easing with increased buying of the US Treasury securities and mortgage backed securities at the current pace, which would support credit flows to businesses and households. Besides, the Bank will continue to offer ‘large scale’ overnight and term repos in money markets, and these operations would be adjusted as necessitated.
Federal Reserve Projections
In 2020, the Board expects GDP to contract anywhere between 10% to 4.2% with a median expectation of 6.5% contraction in GDP. In 2021, the members expect the economy to rebound and deliver GDP growth of 7% at the high end with 1% contraction at the lower end of the range.
Likewise, they expect the US economy to return to economic expansion in 2022 with GDP growth of anywhere between 2% to 6%. At best, the unemployment rate could go down to 7% by the end of this year, and it could hit 14% as well.
In 2021, the members expect unemployment to range between 4.5% to 12%, which may fell to 4% to 8% in the year 2022. Core inflation, which excludes food and energy, is expected to be in a range of 0.7% to 1.3% this year.
In 2021, core inflation may hit 2% at the high end with 1.2% at the lower end. And, in 2022, it could be around 1.2% to 2.2%. The members anticipate Fed Funds Rates to remain unchanged until 2021, and it may reach 1.1% by the end of 2022 at the high end of the range. Long run range of Fed Funds Rate is expected to between 2% to 3%.
Meanwhile, the US market closed on a negative note on 11 June 2020, with the S&P 500 index seeing a huge cut of 5.89% to settle the day’s trade at 3,002. The fall marked the biggest one-day loss since March 16 of this year. The market reacted to the fears of renewed COVID-19 cases and the Feds forecasts.