The Federal Reserve on Wednesday said it will keep buying bonds until it sees “substantial progress” in returning the economy to healthy growth and stable 2% inflation.
In a statement at the conclusion of its two-day policy meeting, the central bank said it would buy at least $80 billion per month of Treasury bonds and $40 billion of agency mortgage-backed securities “until substantial forward progress has been made toward the FOMC’s maximum employment and price stability goals.”
Previously, the Fed had only said the purchases would continue in “coming months.”
The Fed did not change its program to expand its purchases of more longer-dated paper, as some economists and traders had anticipated.
With its policy interest rates pinned at zero, changes in asset purchases are one of the last remaining tools for Fed officials.
“These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses,” the Fed statement said.
Read: The entire Fed statement
With the new guidance, the Fed is hoping that the market won’t expect an end to the bond-buying anytime soon. But it chose not to give any calendar guidance.
Fed officials said again they expect to leave interest rates pinned near zero through the end of 2023. Only five of the Fed officials expect an earlier rate hike.
Fed Chairman Jerome Powell told reporters “the next few months are going to be very challenging” for the economy.
The latest economic data points to a looming slowdown of activity, given the surge in COVID-19 cases across the country.
Powell said he didn’t know how deep the slowdown would be.
“Getting through the next four, five, six months” will be key, he said. Another fiscal stimulus package from Congress will help, the Fed chairman said.
“The case for fiscal policy is very, very strong,” Powell said.
At the same time, there is a sense that things will improve as the COVID-19 vaccines become widely available by next summer. But the Fed doesn’t have any experience to know exactly how it will play out, he added.
“My expectation is the second half of next year, the economy should be performing strongly,” he said.
Congress on Wednesday was still working on details of another fiscal stimulus package.
Powell said the Fed thinks that herd immunity from the coronavirus might be reached “sometime in the middle or second half on next year.”
He said reporters should look to scientists for better answers on that question.
Powell said the Fed’s low interest rates and bond-buying has not caused financial stability concerns. He said home prices are not a financial stability concern at the moment.
On inflation, Powell downplayed concern that inflation might spike once the economy reopens as expected next summer. Airline fares and other prices might spike but won’t be long-lasting, he said. On the other hand, Powell said that the Fed is being honest with markets when it says inflation won’t return to the 2% target until at least 2023.
This could allow the economy to grow for a long time because the Fed won’t have to step in to keep prices from overheating, Powell said.
“We’re thinking this could be another long expansion, and what we’re saying is we’re going to keep policy highly accommodative until the expansion is well down the tracks,” Powell said.
Yields on 10-year Treasurys TMUBMUSD10Y, 0.920% have remained below 1% even with slightly more optimism about the longer-run outlook. Powell brushed aside concern that the Biden administration will not want the Fed to exit its easy policy stance because it would raise borrowing costs. This concern is premature, he said.
The Fed chairman defended the central bank’s new focus on climate change. The Fed has joined the global body of regulators on the climate change issue and is considering a proposal to hold banks responsible for accurately calculating climate-change risk via stress test.
“The Fed is not the forum where all the great issues of the day are to be hashed out, debated and addresses,” Powell said. The Fed’s narrow focus is an emerging risk to banks, the financial system and the economy, he said.
“We are… in the very early stages of understanding what that means, what needs to be done about it, and by whom,” Powell said.