The Federal Reserve, at its last regular meeting of the year, decided to make important changes to its efforts to support the economy, while raising its expectations for future growth.
As expected, the Fed kept its benchmark interest rate near zero after a two-day meeting.
In its statement after the meeting, the Fed said it would continue to buy at least 120 billion yuan of bonds a month “until substantial progress is made in achieving the FOMC’s goal of maximum employment and price stability.”
“These asset purchases have facilitated smooth market operations and accommodative financial conditions that support the flow of credit to households and businesses,” the Federal Open Market Committee added in a unanimous statement.
However, the FOMC did not say it would extend the buying period.
The Fed has pledged not to raise interest rates until inflation exceeds its 2% target, even if unemployment falls to levels that warn of price pressures. The wording of the change underscores the Fed’s commitment to recovering from the downturn caused by the coronavirus.
The market had been expecting the FOMC to roll out adjustments to its asset purchase programme. Since the start of COVID-19, the Fed has been buying short-dated bonds to keep financial markets functioning.
In recent meetings, officials have been discussing the benefits of extending bond maturities in an effort to put more effort into boosting the economy, in the same way that was done after the 2008 financial crisis.
Extending maturities would help lower long-term interest rates, lower borrowing costs and help push yield-hungry investors into riskier assets such as stocks.
In addition to changing the language of the bond-buying program, Fed officials have also upgraded their economic outlook since the last September forecast.
The Fed now expects the median forecast for gross domestic product growth in 2020 to fall 2.4 percent, compared with a 3.7 percent recession forecast in September. The forecast for 2021 now stands at 4.2% growth, up from a previous forecast of 4%; GDP growth of 3.2% in 2022 was also higher than the 3% forecast.
Further forecasts have fallen slightly, from 2.5 per cent to 2.4 per cent in 2023 and then from 1.9 per cent to 1.8 per cent.