The conclusion of the Fed’s last policy meeting in 2020 will end a tumultuous year in which it cut interest rates, accelerated bond purchases and took other extraordinary steps to stem the economic carnage from the pandemic .
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The landscape, however, has changed dramatically since Fed policymakers held their last two-day meeting in early November, with the deployment of a COVID-19 vaccine and one underway, almost certain to boost the outlook. for 2021.
In quarterly economic projections last released in September, Fed officials at the median saw the economy grow 4% next year and the unemployment rate fall to 5.5%. Analysts expect both numbers to improve.
Less clear what, if anything, the Fed decides to do in the meantime, including whether it should focus its $ 120 billion in monthly asset purchases in ways that push rates further down long-term interest, which could help industries like housing that are tied to long-term mortgages.
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It’s a move that many financial markets have called and expected at some point, although Fed officials have mostly said they are not yet ready to do so.
“The case for acting now is strong,” Cornerstone Macro analyst Roberto Perli said, adding that the choice was “a close decision, the time of the meeting.”
The coronavirus is spreading rapidly at a rate of more than 200,000 new infections per day across the country, businesses face the twin challenges of renewed restrictions and more fearful consumers, and job growth is slowing – compelling reasons for the Fed to act.
On the flip side, “the promise of vaccines and the possibility of more fiscal support … could make the Fed wait and see,” Perli wrote in a recent analysis.
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Lawmakers in Congress are locked in negotiations over another federal stimulus package to help struggling businesses and families, but a deal has proven difficult so far.
The Fed is due to release its latest policy statement and economic projections at 2 p.m. EST (7 p.m. GMT). Fed Chairman Jerome Powell will hold a press conference half an hour later.
Analysts expect Powell and his colleagues to provide advice on an important aspect of monetary policy: how long could the Fed continue and under what conditions it could reduce its monthly purchases of government bonds, a flow of support to financial markets to help contain borrowing. costs to consumers and businesses.
The central bank’s fed funds rate – its benchmark overnight rate – has been close to zero since March, so bond purchases are now its closest tool to influence the economy.
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Just as rates are unlikely to rise for perhaps several years, analysts expect the Fed to tie any cuts in its bond purchases to a substantial improvement in the economy – likely pushing everything to “bang” on. its asset purchases until the end of next year or beyond. .
(Reporting by Howard Schneider; Editing by Dan Burns and Paul Simao)