US Federal Reserve keeps key interest rates low

The Fed’s monetary authorities want to maintain their loose monetary policy for a few more years. The reason: the prospects for the economy and the labor market are bleak. The rate of the US Federal Reserve also causes criticism.

The US Federal Reserve is likely to continue its zero interest rate policy for longer due to the corona crisis. This comes from new central bank forecasts released after their rate meeting on Wednesday. According to this, most of the Fed’s monetary policy makers assume that the current interest rate level of almost zero percent will be maintained by the end of 2022.

The Fed announced that the corona crisis would have a major impact on the economy, the labor market and inflation. There are significant economic risks. The central bank expects the economy to shrink by 6.5 percent this year, followed by growth of 5.0 percent in the coming year. The unemployment rate is expected to be 9.3 percent this year and to decrease to 6.5 percent in 2021. Inflation is forecast to be below the Fed’s 2 percent target by 2022.

The Fed has cut key rates to almost zero percent in two major steps since the Corona crisis spread to the United States in March. At the beginning of March, the key interest rate was between 1.50 and 1.75 percent.

Losses on the US stock exchange – Nasdaq remains high

“According to the Fed’s current growth forecast, the US economy will not reach its 2019 level again next year,” wrote analyst Thomas Altmann from QC Partners in an assessment. The central bank’s sense of reality could disappoint some optimists on the stock market, who hoped for a faster recovery in the US economy.

The record hunt by Apple, Amazon, Microsoft & Co didn’t stop on Wednesday. The heavyweights on the Nasdaq technology exchange rose again to high levels. The Nasdaq 100 index subsequently advanced by 1.28 percent to 10 094.26 points. The previous day, the stock market barometer broke the 10,000 meter mark for the first time.

Standard values, on the other hand, fell again after the meeting of the US Federal Reserve. The leading index Dow Jones Industrial lost 1.04 percent to 26,989.99 points and thus slid below the 27,000 mark again. The market-wide S&P 500 declined slightly less by 0.53 percent to 3,190.14 points.

Fed chief Powell: Unemployment could reach millions

The Fed’s response to the Corona crisis to date is unprecedented and even overshadows its intervention in the financial crisis. In addition to interest rate cuts, securities purchases were made on a large scale and numerous credit programs were launched to support the economy. Economists had mostly expected the Fed’s decisions.

Fed chief Jerome Powell found clear words in the face of the severe economic crisis. When asked about the skyrocketing unemployment in the United States, he said that a significant portion of the job losses could be permanent. He cannot rely on reliable estimates. The number of unemployed could well go into the millions, he said.

Powell did not want to paint completely black. When asked whether the world was facing a similar economic crisis as during the “Great Depression” about 90 years ago, Powell replied: “I don’t think the Great Depression is a good example of what is happening.” He mentioned several differences, which is why the corona pandemic differs from the worst crisis in recent economic history. Among other things, Powell referred to the quick and powerful reaction of the US government and the fundamentally good condition of the American economy and the financial system.

Criticism of the actions of the US Federal Reserve

In addition, the central bank specified the extent of its securities purchases to stimulate the economy. The purchases would continue “at least” at the current pace, the Federal Reserve said. The New York Fed, which handles purchases, added that it would invest about $ 80 billion a month in US government bonds. Around $ 40 billion a month is expected to flow into mortgage-backed securities (MBS).

Thomas Gitzel, chief economist at VP Bank, described the news about the Federal Reserve’s planned action as “disappointing”. “There wasn’t much for the financial markets today. The ECB currently seems to understand better what is desired on the stock exchanges,” said Gitzel. Uwe Burkert, chief economist at LBBW Research, anticipates that the US Federal Reserve will continue to buy large amounts of securities in the foreseeable future “to prevent an unintentionally strong rebound in long-term dollar interest rates.”

The Fed’s balance sheet – an indicator of its crisis intervention – has widened to a record high of $ 7.2 trillion. This corresponds to more than a third of the US’s annual economic output.


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