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Fed opens policy final 2020 meeting amid uncertain economy

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Federal Reserve Chair Jerome Powell will speak following the central bank's policy meeting, and will likely face questions on the fate of the economy should Congress not pass another aid package./AFP
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Dec 16, 2020 - 05:57 AM

WASHINGTON — US central bankers on Tuesday opened their final policy meeting of the year to review how best to support the economy as the Covid-19 vaccine rollout gets underway.

But with the benchmark lending rate already at zero, there is little left for the Federal Reserve to do, absent an agreement in Congress on a new federal relief package to help ailing businesses and unemployed workers.

At most, economists say officials in the policy-setting Federal Open Markets Committee (FOMC) could provide more information on potentially increasing the pace of bond purchases above the current $120 billion a month.

But economist Diane Swonk of Grant Thornton said anyone waiting for an announcement of more asset purchases is “likely to be disappointed.”

“Officials will only increase asset purchases if credit markets hit another roadblock and begin to seize,” Swonk said in an analysis.

However, she said “they are likely to signal they will keep those purchases in place until the economy is well beyond the current crisis.”

Officials could make adjustments in the types of assets they buy, extending into longer-term debt as an insurance policy against the near-term risks.

Even as US coronavirus infections continue to spike nationwide, the rollout of the first vaccine and approval of a second has fueled optimism business in the United States can begin to return to normal early next year.

Along with the policy statement, the FOMC will release its latest quarterly economic forecast, which reflects the views of its 17 members on the outlook for the world’s largest economy.

Job gains have stalled but other data have shown improvement in sectors like industrial production, and Fed officials could raise their growth estimates.

The forecasts “will give a better sense of what officials may be considering, especially against a backdrop of near-term risks to growth from the virus versus medium-term upside from a broader reopening once a vaccine is widely available,” Rubeela Farooqi of High Frequency Economics said in an analysis.

But any sign they are expecting a higher interest rate in the next two years could spook markets that are betting on rates being at zero for a long, long time.

As usual, Fed Chair Jerome Powell will hold a press conference after the meeting on Wednesday, and is likely to face more questions on the fate of the economy if Washington lawmakers are unable to bridge their impasse and extend jobless benefits that are due to expire by year’s end.

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