Banking and Finance Law Daily Despite job losses, economic hardship, financial conditions beginning to improve; ‘funds’ rate unchanged
Wednesday, June 10, 2020

Despite job losses, economic hardship, financial conditions beginning to improve; ‘funds’ rate unchanged

By Thomas G. Wolfe, J.D.

Legislative and regulatory policy measures during the coronavirus pandemic have contributed to support the economy and the flow of credit to U.S. households and businesses.

Based on ongoing developments in connection with COVID-19 and on economic information it has received since it last met in late April, the Federal Open Market Committee has unanimously decided to maintain the target range for the federal funds rate at the current zero- to 0.25-percent level. Despite the severe job losses and "tremendous human and economic hardship across the United States and around the world," the FOMC indicates that "financial conditions have improved, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses."

In mid-March, the FOMC significantly reduced the target range for the federal funds rate by a full percentage point (see Banking and Finance Law Daily, March 16, 2020). The Committee expects to continue maintaining the target range for the federal funds rate at its present level until it is confident that the economy "has weathered recent events and is on track to achieve its maximum employment and price stability goals."

U.S. economic outlook. Generally, the FOMC reported that the coronavirus pandemic and the measures taken to protect public health have "induced sharp declines in economic activity and a surge in job losses." Moreover, "[w]eaker demand and significantly lower oil prices are holding down consumer price inflation." According to the Committee, the ongoing public health crisis "will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term."

The FOMC 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." In determining the timing and size of future adjustments to the stance of monetary policy, the Committee will "assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective." This assessment will take into account a wide range of information, including "measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments," the FOMC stated.

In communicating its economic outlook, the FOMC released charts and tables depicting its economic projections.

Treasury securities, MBS holdings. To support the flow of credit to households and businesses, in the coming months, the Federal Reserve will "increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions." In addition, the Open Market Desk will continue to offer "large-scale overnight and term repurchase agreement operations," the FOMC stated.

Discount rate. In connection with the primary credit "discount" rate, the interest rate charged for short-term credit extensions to depository institutions, the Federal Reserve Board voted unanimously to maintain the primary credit rate at its existing level of 0.25 percent. In mid-March, the Fed slashed the discount rate by 1.50 percentage points to its current 0.25-percent level, which previously took effect March 16.

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