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Fed sees some upturn in activity, but maintains a restrained policy

The Federal Reserve on Wednesday noted that economic activity and jobs have “slightly increased in recent months,” once again pledging to use its full range of instruments to support further improvement.

In a statement, the Fed said the path of the US economy “will depend significantly on the course of the virus.”

“After sharp declines, economic activity and employment have risen somewhat in recent months, but well below their levels at the beginning of the year,” the Fed said. Overall financial conditions have also improved in recent months, the central bank said.

Economists are concerned that the latest unofficial data suggests that the US economy is slumping as viruses increase, especially in the south and west.

In a unanimous decision, the Fed voted to keep rates of its federal funds close to zero.

The central bank again said it would keep interest rates close to zero until employment recovers and inflation picks up.

The central bank also kept the pace of asset purchases stable at $ 120 billion a month. The Fed purchases $ 80 billion of Treasurys and $ 40 billion of asset-backed mortgage instruments to support the economy.

Fed Chairman Jerome Powell will hold a press conference to discuss the central bank’s decision at 2:30 pm Eastern.

Economists wonder what the Fed will do if the economy falters again.

The “bazooka” in the Fed’s toolkit would be to record long-term returns on Treasury bills, a policy known as yield curve control.

Economists think the Fed will take incremental policies at its next meeting in September. The Fed is expected to link future rate hikes to higher inflation. The central bank is also expected not to consider raising short-term interest rates until inflation exceeds its 2% target. The Fed may also add a specific period to the pledge.

The Fed can also change its asset purchases to buy more long-term securities.

Many economists view these policy steps as step-by-step. Markets already expect the Fed to keep interest rates ‘low’ for longer. Futures markets will only price one 25 basis point rate hike over the next three years.

The next “big bazooka” for the Fed would be to commit the 10-year rate to the Treasury bill. This is known as “yield curve control” and is used in Japan and Australia.

Fed observers will also like to see what Powell says about the timing of the publication of the Fed’s review of its long-term policy objectives and strategy. This review started in November 2018. The results have been delayed by the corona virus.

Following the September meeting, the Fed may also announce that it has adopted a strategy to make inflation warmer after a period in which inflation remains below the 2% target. This is called setting an ‘average’ inflation target. In the past, the Fed has always “passed away” when inflation was low.

Economists believe that the Fed has already followed this approach informally, but has not been formally announced.

Markets did not change much after the Fed statement. The Dow Jones Industrial Average DJIA,
+ 0.41%
100 points up just after the Fed’s decision.