Fed sees zero rates through 2022 and commits to keep buying bonds

US GDP was projected to contract by 6.5 per cent this year before rebounding 5 per cent next

Federal Reserve Chair Jerome Powell said the central bank will keep buying bond. AP Photo

The US Federal Reserve has pledged to maintain at least the current pace of asset purchases and projected interest rates would remain near zero through 2022.

Chairman Jerome Powell committed the central bank to using all of its tools to help the economy recover from the coronavirus.

“We’re not even thinking about thinking about raising rates,” Mr Powell said on Wednesday.

“We are strongly committed to using our tools to do whatever we can for as long as it takes.”

The Federal Open Market Committee earlier said it would increase its holdings of Treasury and mortgage-backed securities to sustain a smooth market.

The New York Fed said the pace of the increase would be about $80 billion (Dh293.84bn) a month on Treasuries and about $40bn for mortgage-backed securities.

“Acting on mortgage-backed securities and Treasuries underscores their belief that more support is needed,” said Diane Swonk, chief economist with Grant Thornton in Chicago.

“The Fed does not see a victory in the employment bounce-back. The risk of deflation is still high and the economy needs more support to heal more fully.”

US stocks fluctuated and the dollar slumped as investors assessed the Fed’s views on the economy, while Treasuries rallied.

The Fed’s quarterly projections, updated for the first time since December after officials cancelled their March release amid the spreading pandemic, showed that all policymakers expect the rate to remain near zero through the end of 2021.

All but two officials saw that extending through 2022.

The economy faces “considerable risks” over the medium term, the Fed said.

Officials forecast the US unemployment rate would fall to 9.3 per cent in the last three months of the year from 13.3 per cent in May, according to median estimates, and decline to 6.5 per cent in 2021.

GDP was projected to contract by 6.5 per cent this year before rebounding 5 per cent next year.

The better-than-expected May payroll report could mark the low point for the labour market, Mr Powell said, although the fact that it caught so many by surprise “is clear evidence of just how uncertain things are".

He said that the labour market would take time to heal.

”My assumption is that there will be a significant chunk, well, well into the millions of people who don’t get to go back to their old jobs, and there may not be a job in that industry for them for some time," Mr Powell said.

"It could be some years before we get back to those people finding jobs.”

Mr Powell said the open market committee received a briefing on yield-curve control – a strategy to cap Treasury yields to a specific maturity – and that such discussions would continue at coming meetings.

Economists surveyed by Bloomberg expect them to consider adopting the strategy later this year.

The Fed unveiled nine emergency lending programmes to keep credit flowing during the pandemic, although three are still to be launched, including one aimed at high street businesses.

On Monday it said it expanded this programme to include smaller companies and it would be open to eligible lenders “soon.”

Mr Powell said the Fed was looking very strongly at how it could incorporate non-profit organisations in the high street programme or a facility of their own.