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Fed revisits idea of pledging to keep interest rates low

3 Mins read
imageEconomy12 hours ago (Jul 01, 2020 03:30PM ET)

(C) Reuters. FILE PHOTO: Federal Reserve Board building on Constitution Avenue is pictured in Washington

By Lindsay (NYSE:LNN) Dunsmuir and Ann Saphir

WASHINGTON (Reuters) – Federal Reserve policymakers are looking at reviving a Great Recession-era promise to keep interest rates low until certain conditions are met, in a bid to deliver a more rapid recovery from the recession triggered by the coronavirus pandemic.

The policymakers “generally indicated support” for tying rate-setting policy to specific economic outcomes, minutes from the U.S. central bank’s June 9-10 policy meeting showed on Wednesday. “A number” favored a promise to leave rates low until inflation meets or even modestly exceeds the Fed’s 2% goal.

A couple of policymakers preferred tying changes to rates to a specific unemployment rate; a “few others” wanted to promise easy monetary policy until a specific date in the future – an approach the Fed used effectively in 2012 and 2013.

Although two warned of the danger of adopting any such policy, citing financial stability risks, the minutes showed that policymakers overall supported giving the public more explicit forward guidance, both for rates and bond purchases, “as more information about the trajectory of the economy becomes available.”

The readout showed much less support, and many questions, about alternate forms of support including control of the yield curve, a strategy in use by other central banks around the world.

Fed officials anticipate the United States will suffer the worst economic downturn since World War Two, and they have no intent to let up on providing stimulus for the foreseeable future.

“Members noted that they expected to maintain this target range until they were confident that the economy had weathered recent events and was on track to achieve the (rate-setting) Committee’s maximum-employment and price-stability goals,” the Fed said in the minutes.

The U.S. dollar slightly extended losses against the yen and euro while the S&P 500 index edged higher after the release of the minutes.

OUTLOOK UNCERTAIN

The Fed has repeatedly said the U.S. economic outlook remains highly uncertain and reiterated that a full economic recovery hinges on the battle to control the spread of the novel coronavirus, which has killed more than 127,000 people in the United States.

Since the meeting, a surge in U.S. infections has led several policymakers to warn that signs of a nascent economic recovery over the last few weeks could already be under threat as hard-hit states halt or reverse the re-opening of their economies.

The U.S. economy slipped into recession in February and economic output and employment are still far below pre-crisis levels despite a rebound as restrictions were eased. More than 30 million people were receiving unemployment checks in the first week of June, about a fifth of the labor force.

At last month’s policy meeting, the Fed signaled it planned years of extraordinary support for the economy, with policymakers projecting the economy to shrink 6.5% in 2020 and the unemployment rate to be 9.3% at the end of the year.

In addition to slashing interest rates, the central bank has also pumped trillions of dollars into the economy to keep credit flowing to businesses and households.

Americans’ anxieties over the spread of the coronavirus are at the highest level in more than a month, a Reuters/Ipsos poll showed on Wednesday, a day after the United States recorded the biggest single-day rise in new cases since the pandemic began.

Fed revisits idea of pledging to keep interest rates low

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