Federal Reserve: "Zero-Rates are here to stay... least until 2022."

FED chair Jerome Powell stated during today's FOMC meeting that the committee voted to keep rates near zero for the time being. Reasons for this decision:

  • While unemployment has recovered slightly, economic activity has yet to pick up in many areas.

  • Uncertainty is likely to remain until a vaccine becomes available. This creates challenges with the flow of capital. A full recovery needs confidence.

  • The FED's objective is to restore the U.S. economy to max employment and economic & price stability.

  • GDP growth is expected to be the most severe decline on record (Q2 #'s will release on August 27th).

The FED continued to pledge their desire to use "all the tools in their toolbox"to stimulate economic growth & prevent further collapse. This includes increasing their holdings in:

  • Corporate bonds

  • Associated ETF's

  • Mortgage-backed securities (CMBS)

  • Targeted rates are not off the table and are still being evaluated. Currently free-market participants determine treasury rates for T-bills, notes & bonds (e.g. 3m, 1Y, 10Y, 30Y). Targeted rates implies the FED would step in and buy/sell these instruments (manipulate the market) to correct any issues in the interest-rate curve and encourage lending. This has negative ramifications for free-market capitalism but that's an argument for another day.

The FED also resumed the issuance of their S.E.P. (Statement of Economic Projections), something they had avoided since December due to the level of uncertainty. The S.E.P. represents a survey of all Federal Reserve members on a number of economic indicators and their projected estimates for the next 24-36 months. Some key estimates:

  • FED rates will remain near-zero through 2022, where they will then normalize.

  • Economic recovery will begin in the second-half of 2020, continuing for 24 months (supported by near-zero rates).

  • GDP growth in 2021 & 2022 will be much greater than average as the economy recovers before stabilizing at 2% in 2023+

  • PCE inflation in 2020 will end up just shy of 1%. Stabilizing at it's long-term average by 2023.

  • Unemployment will settle at 9% for 2020, gradually normalizing towards 4% by 2023.

All the aforementioned estimates are based on median-projections amongst FED committee members

#FOMC #Covid19 #Economy #InterestRates #Unemployment

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