Fed Holds Rates Near Zero, Delivers Grim Economic Outlook

Federal Reserve projects the U.S. economy will shrink by 6.5% in 2020 and the unemployment rate will be 9.3% at year’s end.

The Federal Reserve on Wednesday announced that it will hold its benchmark interest rate near zero through 2022 to help the economy recover from the COVID-19 pandemic. The central bank also projected that the U.S. economy will contract by 6.5 percent this year, a somber outlook that could even prove optimistic if there is another wave of coronavirus outbreak this fall.

The median projection forecasts real GDP contracting by 6.5% in 2020 with the unemployment rate only dropping to 9.3% by the end of the year, down from 13.3 percent in May but still extraordinarily high.

In a set of new economic projections, most of the 17 members of the Federal Open Market Committee (FOMC) appeared to support keeping the federal funds rate at close to zero through 2022. In “dot plots” mapping out each members’ forecasts, only two policymakers saw a case for hiking rates in 2022.

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Federal funds rate projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assumptions of projected appropriate monetary policy.

According to an FOMC statement:

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. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent.

The Committee expects to maintain this target range 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 group also set a floor for its asset purchases, guaranteeing it would take in at least $80 billion in Treasuries each month and $40 billion worth of mortgage-backed securities.

Read the full FOMC statement for more information.

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