Federal Reserve Warns Of ‘Considerable Risks’ To Economic Outlook, Keeps Interest Rates Unchanged

The Federal Reserve announced on Wednesday it will keep its benchmark federal funds rate unchanged at zero to 0.25%.

The Federal Open Market Committee noted that it expects to maintain this target range “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

“The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world,” the central bank said. “Following sharp declines, economic activity and employment have picked up somewhat in recent months but remain well below their levels at the beginning of the year. Weaker demand and significantly lower oil prices are holding down consumer price inflation. Overall financial conditions have improved in recent months, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.”

The Fed cautioned the trajectory of the U.S. economy “will depend significantly on the course of the virus. The ongoing public health crisis will weigh heavily on economic activity, employment and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.”

The Fed also noted that in the coming months, it will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities “at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions.”

The Fed also said it will extend its temporary U.S. dollar liquidity swap lines and its temporary repurchase agreement facility for foreign and international monetary authorities, or FIMA, through March 31.

These facilities had been established four months ago, the central bank explained, to “ease strains in global dollar funding markets resulting from the COVID-19 shock and mitigate the effect of such strains on the supply of credit to households and businesses, both domestically and abroad.”

The Fed expects these extensions will “help sustain recent improvements in global U.S. dollar funding markets by maintaining these important liquidity backstops.”

In addition, the FIMA repo facility will help “support the smooth functioning of the U.S. Treasury market by providing an alternative temporary source of U.S. dollars other than sales of securities in the open market.”

Moreover, the extension of the temporary swap lines will apply to all nine central banks as previously announced on March 19. These swap lines permit the provision of U.S. dollar liquidity in amounts up to $60 billion each for the Reserve Bank of Australia, the Banco Central do Brasil, the Bank of Korea, the Banco de Mexico, the Monetary Authority of Singapore and the Sveriges Riksbank of Sweden.

The swap lines also allow the provision of U.S. dollar liquidity in amounts up to $30 billion each for Danmarks Nationalbank of Denmark, the Norges Bank of Norway and the Reserve Bank of New Zealand.

Eric Winograd, senior economist for fixed income at AllianceBernstein, was disappointed by the Fed’s statement.

“This is a Fed that tells us they’re going to use all their tools to support the economy, yet they continue to punt on doing anything in terms of monetary policy,” Winograd said. “They’re showing a sense of urgency to support financial markets. They’re not showing support to support the real economy.”

Danielle DiMartino Booth, CEO and chief strategist of Quill Intelligence in Dallas and a former advisor to the president of the Dallas Fed commented: “The Federal Reserve is in damage control to offset the growing anxiety surrounding the fiscal cliff the economy veers over on Friday with the expiration of the extra weekly unemployment benefits.”

Booth added: “While the stock market has rebounded from its March downturn thanks in large part to the Fed's actions, there is still plenty of fear in the air over the reopening of the U.S. economy, as seen in the continued decline of government bond yields and the surge in gold prices. The Federal Reserve's many actions to fight the economic fallout of COVID-19 are not enough and investors are looking for more efforts on the fiscal side.”