Fed vows to maintain bond-buying until 'substantial progress' in recovery

WASHINGTON (REUTERS) – The Federal Reserve on Wednesday (Dec 16) promised to keep funneling cash into financial markets further into the future to fight the recession, even as policymakers’ outlook for next year improved following initial rollout of a coronavirus vaccine.

Repeating a pledge to keep its benchmark overnight interest rate near zero until an economic recovery is complete, the US central bank said it would also now tie its programme of monthly government bond purchases to that same goal.

Purchases would continue “until substantial further progress has been made towards the Committee’s maximum employment and price stability goals,” the Fed’s rate-setting committee said in a unanimous policy statement after the end of a two-day meeting.

It was the more incremental step of the options the Fed was weighing, taken as policymakers boosted their outlook for economic growth next year to 4.2 per cent from 4 per cent at the median, and lowered the expected year-end unemployment rate from 5.5 per cent to 5 per cent.

With the economic landscape brightening, the Fed did not change the type or pace of assets being purchased, a step many analysts had expected as a way for it to provide more immediate help to the economy in the months that it will take for the vaccine’s impact to be felt.

The language does for the first time however link its US$120 billion in monthly purchases of US Treasury bonds and government-backed securities to a set of economic conditions. It had previously pledged to make those purchases only “over coming months,” with no firm guidance about when the recession-fighting program might stop.

“We had expected perhaps an extension of the maturities of the asset purchases. They didn’t do that,” said Kathy Bostjancic, chief US financial economist at Oxford Economics.

“But this guidance, forward guidance on QE (quantitative easing) is pretty powerful in the sense they are going to maintain the amount of purchases until they feel they have made substantial progress toward the dual mandate. So that gives some clarity, which is good.”

US stocks, up slightly on the day ahead of the Fed’s statement, pared their gains. Benchmark US Treasury security yields ticked higher, and the dollar edged up against major trading partner currencies.

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Fed chairman Jerome Powell will discuss the policy decision in a news conference on Wednesday afternoon.

The Fed’s statement came as negotiators in Congress were”closing in on” a US$900 billion (S$1.2 billion) Covid-19 aid Bill that will include US$600 to US$700 stimulus cheques and extended unemployment benefits.

Barring more aid from Washington, millions of unemployed Americans were slated to lose unemployment benefits the day after Christmas.

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