Key Points

  • The Fed kept rates pinned to zero, while putting a floor under its monthly purchases of Treasuries and mortgage-backed securities.

  • Economic projections from the FOMC were updated; and a sharp rebound in GDP growth is expected in 2021 after a dismal 2020.

  • Jerome Powell emphasized that the Fed’s emergency tools will eventually have to be put “back in the toolbox.”

As expected, the Federal Reserve kept rates unchanged at 0-0.25% and said it will keep them near zero through at least 2022, in a unanimous vote. On the economy, the Fed expects real gross domestic product (GDP) to fall 6.5% in 2020; rebounding to a 5% increase in 2021, as the economy recovers from the COVID-19 pandemic. A recession was officially declared—by the official arbiters of recessions, the National Bureau of Economic Research (NBER)—as starting in February.

Fed puts floor under asset purchases

The Federal Open Market Committee (FOMC) statement repeated the commitment from the April meeting that it “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. Key in the statement with regard to asset purchases: “To support the flow of credit to households and businesses, over 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.”

An accompanying statement from the Federal Reserve Bank of New York said the pace of the increase in purchases would be at least $80 billion per month of Treasuries and $40 billion per month of mortgage-backed securities. Bond purchases were a major focus heading into today’s meeting given the Fed had scaled back its purchases sharply from the peak of $350 billion per month of Treasury purchases.