US Federal Reserve vows to keep providing aid and does not expect rates hike

Federal Reserve chairman Jerome Powell

The US Federal Reserve has made clear that it will keep providing support by buying bonds to maintain low borrowing rates and forecasting no rate hike until 2022.

The Fed has cut its benchmark short-term rate to near zero. Keeping its rate ultra-low for more than two more years could make it easier for consumers and businesses to borrow and spend enough to sustain an economy depressed by still-widespread business shutdowns from coronavirus.

Stock prices initially rallied modestly after the Fed issued its latest policy statement before falling back into negative territory.

Speaking at a virtual news conference, chairman Jerome Powell said that a surprise job gain in the May jobs report that the government released last week was encouraging but hardly enough to ensure that the job market or the economy is back on track.

The labour market may have hit bottom in May,” Mr Powell said. But, he added, “we’re not going to overreact to a single data point.”

Stressing the Fed’s commitment to ultra-low borrowing rates for the foreseeable future, the chairman said: “We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates.”

In the statement, which followed its latest policy meeting, the Fed also credited its emergency lending programmes for reviving the flow of credit to households and businesses, after markets had locked up in March when investors sold a range of securities to boost their cash holdings.

The central bank noted in its statement that the viral outbreak has caused a sharp fall in economic activity and surge in job losses. Fed officials estimate that the economy will shrink 6.5% this year, in line with other forecasts, before expanding 5% in 2021. The forecast sees the unemployment rate at 9.3%, near the peak of the last recession, by the end of this year. The rate is now 13.3%.

The Fed also specified that it will buy 80 billion dollars of Treasury securities a month and 40 billion dollars in mortgage-backed securities. The central bank has been slowing its purchases from as high as 375 billion dollars a month in March. But this is the first time that the Fed has indicated the size of the purchases it will pursue in the coming months.

At his news conference, Mr Powell began by acknowledging the widespread protests in the aftermath of George Floyd’s killing that have called attention to racial injustices.

I want to acknowledge the tragic events that have put a spotlight on (issues of racism),” Mr Powell said. “There is no place at the Federal Reserve for racism, and there should be no place in our society.”

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