The Federal Reserve left rates on hold at a historic low of zero to 0.25 per cent and vowed to continue its purchase of Treasury and agency mortgage-backed securities “as needed”.
“To support the flow of credit to households and businesses, foster smooth market functioning, and promote effective transmission of monetary policy to broader financial conditions, we have been purchasing large amounts of Treasury and agency mortgage-backed securities,” Federal Reserve chairman Jerome Powell said in a statement. “While the primary purpose of these securities purchases is to preserve smooth market functioning and effective policy transmission, the purchases will also foster more accommodative financial conditions.”
Mr Powell also de-emphasised the use of negative rates, holding up forward guidance and the continuation of its asset purchase plans as more appropriate policy.
Rick Rieder, BlackRock chief investment officer of global fixed income, believes the Fed is now affirming its transition from emergency financial market support to a long-term large-scale asset purchase plan – “QE Infinity” – that will see it prop up markets essentially indefinitely.
“The overarching theme of yesterday’s FOMC statement and press conference was that the Fed is committed to doing ‘whatever it takes,’ and more, just to make sure as strong as possible a recovery can be re-established,” Mr Rieder said. “As such, it’s abundantly clear from the new FOMC statement and press conference that this represents chair Powell’s ‘Mario Draghi Moment’ where like the former president of the ECB, he’s effectively committed to ‘do whatever it takes’ to aid the economy through this severe stress.”
However, Aberdeen Standard Investments senior global economist James McCann believes the Fed “needs to be bolder” and “cannot afford to rest on their laurels”.
“Its first step should be to increase the scale and scope of its credit easing measures to ensure that liquidity flows to those parts of the economy facing a crunch,” Mr McCann said. “It also needs to innovate and helicopter money should be on the table. What’s being considered at the moment isn’t genuine helicopter money because the measures being proposed to fund fiscal efforts are not permanent. That’s a crucial difference.”
By making them permanent the Fed could powerfully boost growth and inflation, in a way that’s unlikely to happen if they just stick to the same old tools.”
