Fed Chairman Powell Basically Commits to Quantitative Easing to Infinity, If Needed

Jon C. Ogg

The U.S. economy has already seen its short-term interest rates taken down to zero-percent, and the Federal Reserve has injected trillions of dollars into the economy with asset purchases and other quantitative easing. Fed Chair Jerome Powell has not committed to negative interest rates, but he has effectively given a “whatever it takes” pledge to get the economy back into growth after the COVID-19 pandemic.

The Federal Reserve’s FOMC voted to maintain the existing fed funds range of 0.00% to 0.25%. Further, the FOMC communicated that fed funds are currently expected to remain this low until the committee is confident that 1) the economy has weathered recent events and 2) is on track to achieve its maximum employment and price stability goals.

In the implementations, the Federal Reserve System was also shown to have voted unanimously to approve the establishment of the primary credit rate at the existing level of 0.25%.

According to Chairman Powell and the FOMC decision on interest rates, Wednesday’s statement said that the Federal Reserve is committed to using all available tools to support the U.S. economy to get through this challenging time.

Along with noting that the coronavirus outbreak is causing tremendous human and economic hardship, the virus itself and the measures being taken to protect public health have created sharp declines in economic activity. There has been a surge in unemployed people and weaker demand at the consumer and business levels. Another issue hurting the economy is that the massive drop in oil and gasoline prices along with weaker consumer demand are holding down inflation.

As the ongoing public health crisis is expected to keep pressure on the economy, along with employment and inflation, the near-term issues bring considerable risks to the economic outlook over the medium term.

The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy.

As for any future adjustments to the stance of monetary policy, the FOMC will assess realized and expected economic conditions in its mandate of stable prices (2% inflation) and maximum employment. A wide set of views would be kept on the following: labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

The Federal Reserve has also pledged to continue buying assets (Treasury securities and agency-backed residential and commercial mortgage-backed securities). The Open Market Desk will also continue to offer large-scale overnight and term repurchase agreement operations, with a commitment to closely monitor market conditions. The FOMC further added that it is prepared to adjust its plans as appropriate, and these actions were also included in the Policy Implementation notes:

  • Conduct overnight reverse repurchase agreement operations at an offering rate of 0.00 percent and with a per-counterparty limit of $30 billion per day; the per-counterparty limit can be temporarily increased at the discretion of the Chair.
  • Roll over at auction all principal payments from the Federal Reserve’s holdings of Treasury securities and reinvest all principal payments from the Federal Reserve’s holdings of agency debt and agency MBS in agency MBS and all principal payments from holdings of agency CMBS in agency CMBS.
  • Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency MBS transactions.

In Fed Chair Powell’s commentary after the official statement, Powell did warn that the data from the second quarter of 2020 are going to be worse than anything that has been seen so far, that the Fed was in no hurry to end its stimulus, and that this is not the time to act on concerns about federal debt levels.

While no additional dollar terms were committed to for longer than the next few weeks and months, Chairman Powell’s pledge basically is a commitment to offering whatever stimulus is needed to get the economy back up and running.