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US Federal Reserve keeps key interest rate at a low level

The US Federal Reserve promises low interest rates in the long term. This is intended to overcome the consequences of the corona pandemic. The central bank also encourages Congress and the government to take further action.

Despite the ongoing corona crisis, the US Federal Reserve (Fed) has raised its economic forecast significantly. In addition, it plans to keep its key interest rate at close to zero until the end of 2023, as the central bank announced on Wednesday. Central bank governor Jerome Powell said the economy was recovering from the crisis faster than expected in June. A full recovery is unlikely until the coronavirus pandemic is brought under control. The central bank has been determined to use its “full range of tools” to cushion the consequences of the corona crisis, he said.

The further economic development of the world’s largest economy is still very uncertain because of the pandemic, Powell said. The money market committee therefore left the key interest rate unchanged in the range of 0 to 0.25 percent. The Fed is now assuming that it will maintain this interest rate level until the goals of full employment and an inflation rate of up to or a good two percent are achieved.

Economic forecast raised significantly

However, the Fed raised its economic forecasts significantly. For 2020 the central bank now expects the economy to shrink by 3.7 percent. In June, a drop of 6.5 percent was feared. The forecast for the unemployment rate is also more optimistic. It should fall to 7.6 percent by the end of the year, after a forecast of 9.3 percent in June. The Fed expects an unemployment rate of 5.5 percent by the end of 2021. That would also be significantly higher than before the worsening of the corona pandemic. In February the rate was still at a very low 3.5 percent.

Powell said the current crisis was the worst recession in recent history and could not be overcome quickly. In order to achieve a full recovery, not only monetary policy, but also fiscal policy is required, Powell said, referring to the actions of the government and Congress. “My feeling is that it will need more fiscal support,” said Powell. The previous economic stimulus packages were decisive for stabilizing the economy in the midst of the corona crisis, he said.

The negotiations between parliament and government about another economic stimulus package have been stuck in a dead end for weeks. President Donald Trump’s Republicans only want a limited stimulus package of a few hundred billion US dollars, while the Democrats recently had a compromise package of 1.5 to 2 trillion dollars. Since the beginning of the Corona crisis, Congress and the government have already decided on economic stimulus packages worth almost three trillion US dollars, which corresponds to more than ten percent of annual economic output.

The pandemic continues to slow the world’s largest economy. The unemployment rate fell back to 8.4 percent in August, but around 30 million people are still receiving some form of unemployment benefit.

US President promises rapid economic recovery

Trump, who is running for a second term in November, anticipates a very rapid economic recovery by the end of the year. Most analysts’ forecasts are more cautious, however.

Because of the pandemic, the Fed has already lowered its key interest rate since February, multiplied bond purchases and launched extensive loan programs to stabilize the financial markets and the real economy. According to experts, the Fed’s crisis measures are already more extensive than those after the global financial crisis in 2008/2009.

Around 40,000 new corona infections are currently reported in the USA every day. According to data from the University of Johns Hopkins, there are now almost 6.6 million confirmed infections with the Sars-CoV-2 pathogen and around 196,000 related deaths.

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