Fed votes to hold US interest rates near zero, raises 2020 GDP outlook

Author: Adam Yanelli

2020/12/16

HOUSTON (ICIS)--The US Federal Reserve voted on Wednesday to hold interest rates at 0-0.25% and committed to keeping rates at current levels until the economy recovers.

In a separate statement, the Fed raised its GDP growth projections for 2020-2022.

The central bank reiterated in a statement following its 15-16 December meeting of the Federal Open Market Committee (FOMC) that the outlook for the US economy will continue to depend significantly on the course of the coronavirus, which will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.

Economic activity and employment have continued to recover but remain well below their levels at the beginning of the year, the Fed said, adding that it seeks to achieve maximum employment and inflation at the rate of 2% over the longer run.

“Weaker demand and earlier declines in oil prices have been holding down consumer price inflation,” the Federal Reserve said. “Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to US households and businesses.”

The Fed said it will continue to increase its holdings of US treasury securities by at least $80bn per month and of agency mortgage-backed securities by at least $40bn per month until substantial further progress has been made toward the Committee's maximum employment and price stability goals.

“These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses,” the Fed said.

In its summary of economic projections, released in conjunction with the FOMC meeting, the Fed said it expects 2020 full year GDP to contract by 2.4%, which is an upward revision from its previous projection of a contraction of 3.7%. These projections are based on input from each of the FOMC meeting participants.

The Fed raised its GDP projection for 2021 to 4.2% growth from 4.0% in its previous projection. The Fed expects GDP to grow at 3.2% in 2022, which is up from 3.0% in its previous projection.

The Fed said it expects inflation to rise in 2021 and 2022, but it will remain below its target rate of 2.0%.

The Fed expects the unemployment rate to continue to improve, projecting a rate of 6.7% for 2020, which is improved from its projection of 7.6%. The Fed sees unemployment of 5% in 2021 (5.5% previously) and 4.2% in 2022 (4.6% previously).

Unlike many central banks, the Federal Reserve has a dual mandate to keep inflation under control and to encourage maximum employment.

Demand for plastics and chemicals tends to rise and fall at multiples of GDP. As a result, demand usually falls during recessions and rises during expansions.

Interest rates and other monetary policies can affect GDP by increasing or restricting the availability of credit to companies and households.

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