Fed Continues Buying Bonds to Maintain Zero Interest Rate for Extended Period

No Fixed End Date for Asset Purchase Program
Continuous Bond Purchases to Induce Market Interest Rate Decline
Also to Preempt 'Tightening Spasm'
Dot Plot Indicates Zero Interest Rate Until 2023
US Congress Nears Agreement on $900 Billion Economic Stimulus Bill

[Image source=Reuters Yonhap News]

[Asia Economy New York=Correspondent Baek Jong-min] On the 16th (local time), the U.S. central bank, the Federal Reserve (Fed), presented a clear guideline on its asset purchase program, which can be seen as a firm statement of its intention to keep interest rates at zero for an extended period until the economic damage caused by the COVID-19 pandemic is fully recovered.

◆ Fed Indicates Prolonged Bond Purchases = The Fed's stance announced that day cannot be regarded as a more aggressive market intervention through monetary expansion policies. The market had hoped that the Fed would include longer-term bonds or increase the purchase scale to supply more liquidity. Since June, the Fed has been purchasing bonds worth $120 billion monthly, including $80 billion in U.S. Treasury securities and $40 billion in asset-backed securities. This was effectively a quantitative easing (QE) measure.

After last month's Federal Open Market Committee (FOMC) meeting, there were discussions among Fed officials about possible changes to the bond purchase program. According to the minutes, various opinions were presented, including providing guidance on bond purchases, expanding purchases, or reducing them.

The Fed ultimately decided to maintain the current level of bond purchases while indicating a timeline for tapering, although it did not specify a clear date.

One major foreign news outlet interpreted this as suggesting that bond purchases could be prolonged longer than expected by expressing that the tapering would occur when employment and inflation targets are met. Previously, after launching the asset purchase program in June, the Fed had mentioned that the continuation period would be for the next few months. This announcement resolved that uncertainty.

Although the Fed did not express a stronger intention to stimulate the economy by extending the average maturity of purchased bonds or increasing the total scale as the market expected, Fed Chair Jerome Powell personally clarified. At a press conference, Powell emphasized, "The asset purchase guidelines send a strong message that the Fed is committed to supporting economic recovery," and explained, "If the recovery is delayed, we will expand asset purchases." The Wall Street Journal (WSJ) described this as "the Fed raising the hurdle for monetary policy normalization."

◆ Zero Interest Rate Likely Maintained Until 2023 = The Fed raised its economic growth forecasts for this year and next but projected that the zero interest rate policy would be maintained at least until 2023. According to the dot plot released that day, which shows Fed officials' future rate projections, only 6 out of 17 members expected rate hikes by 2023.

WSJ reported that this suggests a longer need for zero interest rates despite inflation reaching the Fed's 2% target and unemployment falling below 4% by the end of 2023.

Powell also made it clear that inflation would be limited. While expecting inflation to rise next year due to the base effects of the COVID-19 pandemic, Powell predicted, "Despite accommodative monetary policy, inflation will be difficult to increase."

Experts explained that the Fed's guideline announcement is a precaution against the "taper tantrum" in 2013, when then-Fed Chair Ben Bernanke suddenly announced a reduction in asset purchases, causing interest rates to spike. Former Fed economist William English also stated, "The Fed's guidelines are effective in preventing the market from making incorrect judgments."

◆ U.S. $900 Billion COVID-19 Relief Package Nears Agreement = Meanwhile, Powell reiterated the need for a congressional stimulus package. Since July, Congress had failed to reach an agreement, but this time, the likelihood of consensus is high. U.S. media reported that congressional leaders are close to agreeing on a $900 billion stimulus bill, including cash payments of $600 to $700. The COVID-19 relief package, which had been deadlocked for months, is now likely to pass this week.

This content was produced with the assistance of AI translation services.