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Fed maintains 0% rate, sees need for continued fiscal stimulus

Chairman Jerome Powell doesn’t see any need to tighten Fed’s target rate for a very long time


The Fed is watching the course of the coronavirus, and data it monitors, such as card spending, may indicate a slowdown in recovery.

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In a unanimous vote, the Federal Reserve decided at its July meeting to keep its target interest rate in the 0% to 0.25% range, citing the hardship brought about the COVID pandemic.

The average credit card interest rate, which is tied to the Fed’s target interest rate, was at 16.03% for the week of July 29.

In a prepared release, the Federal Open Market Committee, the Fed’s rate-setting body, noted that while employment and economic activity have “picked up somewhat” after steep declines, they are still not anywhere near where they were at the beginning of the year. And lower oil prices and weaker demand have been holding price inflation in check.

However, the Fed sees overall an improvement in financial conditions as a result of its supportive stance that has kept credit flowing to consumers and businesses.

The Fed said, “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 central bank will monitor input relating to public health, and also global developments and “muted inflation pressures” as it decides on how best to provide economic support. The Fed will also continue buying Treasury and mortgage-backed securities at least at the same pace as it is currently to support the market.  

See related: Is universal basic income better than one-time stimulus payments?

Rate of economic growth slowing?

In a related press conference, Federal Reserve Chair Jerome Powell noted that while household spending seems to have rebounded, partly due to the government’s stimulus spending, business spending is yet to recover. He expects that the contraction in second quarter economic output will “likely be the largest on record.”

While about a third of the jobs lost in March and April had been recovered by June, overall inflation is below the Fed’s 2% target, considering that sectors such as hospitality and travel have been particularly hard hit, even though food prices are up.

With COVID cases having increased in many parts of the country, he sees the path toward recovery as “extremely uncertain” and dependent on keeping the virus in check. Powell sees social distancing measures and a faster reopening as going together and “not in competition with each other.”

The Fed is monitoring certain “high frequency” data such as spending on credit and debit cards. This card spending slowed down in late June and the pattern indicates that the pace of recovery has slowed down, even though economic activity picked up in May and through June.

While the data point to a slowing, it is too early to say how big that will be. However, he sees spending on housing and motor vehicles as points of strength.

See related: Fed: Card balances outstanding continued to decline in May

Need for more government support

About whether he sees the pandemic unemployment benefits as providing an incentive for people to stay away from work, Powell noted that the initial fiscal response was strong and that’s really helping the economy now.

The fiscal stimulus has been “money well spent,” and the spending will “stand up to scrutiny down the years,” considering that the pandemic represents the biggest shock “in living memory” to the U.S. economy, Powell said. He anticipates that there is a need for “continued support from both monetary and fiscal policy.”

Even if the reopening goes well and people go back to work, hard-hit sectors such as hospitality and airlines will not regain all the jobs they lost, and people will continue to need support. Moreover, the impact is “falling heavily on people with the least wherewithal to bear it,” including minorities and women.

He expects that people will be struggling to get back to work for a long time, and in the absence of inflationary pressures, the Fed will not even be thinking about thinking about raising rates for a very long time.

As for the prospects of help from the potential development of a vaccine that fights the virus, Powell noted that there is a lot of uncertainty around that. That’s why the Fed will continue to provide support and hope for the best while planning for the worst.

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