Fed Focusing on Policy Tools to Support Economy
We don't think the Fed will be in any rush to raise rates, but so far its massive interventions appear to be working.
With everything else the Federal Reserve is up to, rate decisions from the Federal Open Market Committee seem like a sideshow. Nevertheless, the Fed issued its latest FOMC statement and, unsurprisingly, held the federal-funds rate at a range of 0% to 0.25%. The vote was unanimous. The Fed emphasized that it will maintain its current rate “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 Fed also emphasized that it will continue to purchase as many Treasuries and agency MBS and CMBS as necessary to support the market, and that the Fed remains committed to its “full range of tools to support the U.S. economy.”
In other words, we don’t think the Fed will be in any rush to raise rates, even when the economy initially starts to recover. We think a robust recovery will have to be well underway before the next rate hike occurs. The Fed also still has a lot of room to support the economy with its other tools. Most recently, the Fed made modifications to its municipal liquidity facility, announced the creation of its main street lending program, and expanded its corporate credit facilities. At this point, with the importance of rates as a monetary policy tool fading into the background, we think the main focus will be on using these other tools to their full potential. We also don’t expect a series of new tools to be created at this point, as the current set appears to be fairly robust, and we expect the Fed to wait for more data before deciding if the current tool set isn’t enough. So far, the Fed’s massive interventions appear to be largely working, with spreads and liquidity in major asset types largely stabilizing after the initial spikes in instability when the crisis was beginning. We’ll have to wait and see if the lending interventions have their intended effect and allow consumers and businesses to “bridge the gap” between now and when the economy can reopen again.
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