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Fed to maintain aggressive asset purchases until ‘substantial further progress’ on recovery

Brian Cheung
·Reporter
·3-min read

The Federal Reserve on Wednesday held interest rates at near-zero but messaged that it would not begin tapering its asset purchase program until “substantial further progress” has been made in the economic recovery.

In recent months, the Fed has been aggressively buying U.S. Treasury bonds and mortgage-backed securities to the tune of $120 billion per month.

The Federal Open Market Committee’s statement added new language committing to keeping those purchases at least at that pace “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”

The Fed’s decision, its last for 2020, signals that it can continue to provide more monetary stimulus to the U.S. economy if the surge in COVID-19 cases threaten the pace of recovery. For example, the central bank could either increase the aggregate purchases or target longer-dated securities — or even both.

Still, the FOMC noted optimism in its forecasts, perhaps due to developments on the vaccine. The nationwide rollout of the first COVID-19 shots began this week, and a second vaccine may get FDA approval soon.

The statement continues to note that “the path of the economy will depend significantly on the course of the virus.” The decision was unanimous among the FOMC.

Brighter forecasts

Despite new highs on COVID-19 cases across the country, Fed officials broadly appeared more optimistic due to the upside of the vaccine rollout.

New economic projections released alongside the statement had slightly brighter expectations for where the unemployment rate and economic growth would head in 2021.

The median member of the FOMC expects to see the unemployment rate end 2021 at 5.0%, compared to 5.5% as projected in September. The median expectation is now also for real GDP in the U.S. to grow by 4.2% in 2021, compared to 4.0% as projected in September.

Like the September projection, the FOMC’s median projection released Wednesday is for interest rates to remain in the target range of 0% to 0.25% at least through the end of 2023. However, five members of the FOMC now see a case for at least one rate hike by that point in time, compared to just four in the September forecasts.

On inflation, the Fed continued to project core personal consumption expenditures (the central bank’s preferred measure) coming in below its 2% target, expecting just 1.8% in inflation 2021. However, that figure is a notch up from the 1.7% projected for 2021 in the September forecast.

With the Fed signaling that it will wait to reach its 2% target before considering a rate hike, the forecasts continue to illustrate the central bank’s patience on keeping monetary policy accommodative.

New charts added to the Fed’s summary of economic projections caution that many of their forecasts are highly uncertain.

A “diffusion index” chart shows that nearly every member of the FOMC saw greater uncertainty facing their unemployment, GDP, and inflation forecasts relative to levels over the last 20 years.

The Fed’s first policy-setting meeting of 2021 is scheduled for January 26 and 27.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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