Fed Leaves Rates Unchanged and Commits to Ongoing Bond Purchases

The central bank’s policies mainly work by making credit cheaper so that households and businesses will have an incentive to borrow and spend, pumping up demand in the economy. Faced with more demand, the logic goes, employers will hire and will have the wherewithal to lift wages and prices.

The Fed had traditionally used its policy interest rate — the federal funds rate — as its primary policy tool, but it has cut that rate to rock bottom in the last two crises. Both in 2008 and now, the central bank has turned to large-scale bond purchases as a supplementary policy lever.

Bond buying works both to calm markets by creating a constant source of demand for government-backed securities, and provides a boost to the economy both by lowering longer-term interest rates and by nudging private sector money into slightly riskier investments, like stocks.

Mr. Powell suggested that the Fed would be in no hurry to stop its asset purchases, which he called “accommodative” — meaning they are aimed at bolstering the economy — saying the time when they are no longer necessary is “some ways off.”

The central bank has also implemented an array of emergency lending programs during the pandemic recession, commonly called “13-3 programs” for the section of the statute that enables them. Its efforts have bought corporate bonds, lent to small and mid-sized businesses, and helped to keep credit flowing to state and local governments.

While those programs have been the subject of criticism at times for their stringent terms, or for propping up big corporations more effectively than small ones, they have also provided a key backstop for financial markets during a fraught period.

Steven Mnuchin, the Treasury secretary, has to sign off on such efforts. He said last month that he would be shutting down five of the loan programs, all of which were backed by a congressional appropriation. The Fed deferred to him on the decision — which Mr. Mnuchin said was necessary under his reading of the law — but expressed dissatisfaction with his choice.

Article source: https://www.nytimes.com/2020/12/16/business/economy/fed-december-meeting-jerome-powell.html