Officials expect coronavirus to ‘weigh heavily’ on economy

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The Federal Open Market Committee expressed concern at its last meeting over the future of the economy, saying the coronavirus will likely continue to slow growth and potentially pose dangers to the financial system.In the July 28-29 session, the Federal Reserve’s decision-making body voted to keep short-term interest rates pegged near zero, citing an economy that was below pre-pandemic levels .

Officials present at the meeting “agreed that the current public health crisis will weigh heavily on economic activity, employment and inflation in the near term and pose significant risks to the medium-term economic outlook,” said the summary of the meeting.

The comments further indicated that while members favor clarifying their expectations of when they will hike rates again, they appear to reject the likelihood of using bond purchases to control bond yields. of state.

Shares gave up some gains after the minutes were released as yields edged down and the US dollar rose.

Due to the impact the virus will have on the economy, FOMC members plan to keep the current overnight borrowing rate in a range of 0% to 0.25% until they be “convinced that the economy has withstood recent events and is on the move. to achieve the Committee’s maximum employment and price stability objectives. ”

U.S. gross domestic product fell at a rate of 32.9% in the second quarter, as the pandemic shut down most non-essential activities. A return to growth is expected in the third quarter, although a resurgence of the virus casts doubt on the aggressiveness of bouneback.

In addition to concerns about overall growth, members expressed concern about the risks to the financial system.

Although Chairman Jerome Powell and other Fed officials have repeatedly said that banks and associated institutions are generally healthy, committee members at the meeting said they were concerned about if that could change if the spread of the virus persists and if “worse” scenarios for the future materialize.

Officials have also expressed concern over rising levels of public debt.

The federal government now has $ 26.6 trillion in debt, a gain of over $ 3 trillion during the pandemic as Congress and the White House rushed to get help for those affected by the shutdown economic. This has coincided with a rush to the treasury bill market and raises concerns that the high level of issuance “could have implications for the functioning of the market.”

Controlling the yield curve, tips also discussed

In addition to researching the reasons behind the policy decisions, investors focused on indices on improved forward guidance, or parameters of future rate action, and on the possibility of using purchases of bonds to control government bond yields.On the issue of performance caps, officials continued to express skepticism about its usefulness.

Members also discussed the basis for these decisions on a specific calendar date, perhaps as opposed to dual term goals. However, the minutes offered no timeline for when the improved stepped guidance would take hold.

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