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Fed maintains 0% to 0.25% interest rate target at November meeting

Fed Chair Jerome Powell sees a need for more fiscal stimulus, going by experiences of post financial-crisis recovery

Summary

The Federal Reserve voted to maintain its target federal funds rate in the 0% to 0.25% range, which means credit card interest rates are likely to linger at their current levels.

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The Federal Reserve voted to maintain its target federal funds rate in the 0% to 0.25% range at its November meeting, citing the continuing human and economic fallouts worldwide from the coronavirus pandemic.

Although economic activity and employment are recovering, they are below the levels seen at the beginning of the year.

For cardholders, the Fed’s ongoing accommodative stance means that card interest rates are likely to linger at their current average level, which is 15.97% as of Nov. 4. Credit card variable interest rates are typically tied to the prime rate, which is based on the Fed’s target interest rate.

The Federal Open Market Committee, the Fed’s rate-setting body, said it will maintain its current near-zero target rate until employment is maximized and inflation is on track to average 2% over time. This means it will be willing to tolerate above-2% inflation for a while, since inflation has been running below 2% for a long time now.

The central bank will also continue with its current pace of purchases of Treasury securities and agency mortgage-backed securities to support the flow of credit in the economy.

In deciding on its next course of action, the Fed will take into account the public health situation, the employment market recovery, inflation readings and inflation expectations, as well as “financial and international developments.”

See related: Fed likely to maintain 0% rate through at least 2023

Need for fiscal stimulus continues

In a press conference following the FOMC meeting, Fed Chair Jerome Powell noted that although the economy had rebounded initially after reopening following the lockdown in the spring, economic activity has moderated in recent months.

Sectors such as travel and hospitality that require people to gather closely have been particularly hard hit. However, business investment has picked up, as has consumer spending, and half of the 22 million jobs lost to the health crisis have been regained. Also, inflation remains below the Fed’s 2% long-run target.

Powell finds “particularly concerning” the recent rise in new COVID-19 cases both in the U.S. and internationally. This makes it more likely that people who had started to engage in activities such as travel and eating out will now pull back.

Although the potential for extreme worst-case risks, or “tail risks” that the Fed was preparing for earlier in the year has diminished, it’s still too early to feel comfortable about the current situation.

Considering that the fiscal stimulus provided by the CARES Act earlier this year made a “critical difference,” Powell noted that “it may take continued support from both fiscal and monetary stimulus considering the extent of the downturn,” to better boost the economy. There is a risk that consumers will run through the savings that they have built up as a result of the CARES stimulus.

Going by the experience of the recovery that ensued after the global financial crisis of the late 2000s, Powell noted that this recovery will be stronger with greater fiscal support. As for the prospect of Congress actually providing this support, he said, “There is more discussion on both sides of the aisle to suggest there will be something.”

Such support would help prevent unnecessary economic scarring, and ward off household and business bankruptcies. The Fed is doing whatever it can to minimize that sort of threat.

See related: Half of Americans say their finances are getting worse amid COVID-19

Fed not out of ammunition

Powell doesn’t believe that the central bank is out of ammunition in case any further action is required. For instance, it could adjust its ongoing asset purchase program, or look at new facilities, to further facilitate the flow of credit in the economy. However, Powell said the Fed will certainly not fund fiscal spending.

Powell declined to comment on any potential for economic uncertainty as a result of the presidential election, only observing that “it’s a good time to take a step back and let the institutions of our democracy do their job.”

Ian Shepherdson, chief economist at Pantheon Macroeconomics, noted in emailed commentary that he expects more stimulus from the Fed.

“We remain of the view that faster QE (quantitative easing) is coming, either in response to the need quickly to finance new stimulus, if a bill passes in the lame-duck session, or simply because the Fed has to do something in the face of Congressional inaction and soaring Covid cases,” Shepherdson wrote. “Joint fiscal and monetary action would be better, but that’s not to say that one can’t happen without the other.”

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