Banking and Finance Law Daily Economic activity and employment ‘have picked up somewhat’; ‘funds’ rate unchanged
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Wednesday, July 29, 2020

Economic activity and employment ‘have picked up somewhat’; ‘funds’ rate unchanged

By Thomas G. Wolfe, J.D.

The FOMC notes that the path of the economy will depend significantly on the course of the coronavirus.

Based on ongoing developments in connection with COVID-19 and on economic information it has received since it last met in mid-June, 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. Acknowledging the "tremendous human and economic hardship across the United States and around the world," the FOMC indicates that, after exhibiting "sharp declines," economic activity and employment "have picked up somewhat in recent months but remain well below their levels at the beginning of the year." In addition, the future path of the economy "will depend significantly on the course of the virus," the Committee stated.

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 "[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." Still, financial conditions have improved in recent months, "in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses."

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.

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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