Fed keeps rate near zero but sees brighter economy in 2021

Wednesday, December 16, 2020

WASHINGTON (AP) — The Federal Reserve said Wednesday that it will keep buying government bonds until the economy makes “substantial” progress, a step intended to reassure financial markets and keep long-term borrowing rates low.

The Fed also said after its latest policy meeting that it will keep its shortterm benchmark interest rate pegged near zero.

The Fed has kept its key rate there since March, when it took a range of extraordinary steps to fight the pandemic recession by keeping credit flowing.

In a series of economic projections, Fed officials painted a brighter picture of the economy next year, compared with its last projections in September. The improvement likely reflects the expected impact of the new coronavirus vaccines.

The Fed now expects the unemployment rate will fall from the current 6.7% to 5% by the end of 2021.

The Fed’s announcement coincides with an economy that is stumbling and might even shrink over the winter as the raging pandemic forces new business restrictions and keeps many consumers at home. Weighing the bleak shortterm outlook and the brighter long-term picture has complicated the Fed’s policymaking as it assesses how much more stimulus to pursue.

With its benchmark rate already near zero, the Fed has turned to bond purchases, buying $80 billion of Treasury securities and $40 billion of mortgagebacked bonds a month. Those moves indirectly lower rates on mortgages, auto loans and credit cards, with the aim of encouraging more borrowing and spending.

Chair Jerome Powell and many other Fed officials have repeatedly urged Congress to approve more economic aid to carry the economy through what’s expected to be a financially painful winter, with cold weather foreclosing outdoor dining and rising virus cases discouraging many Americans from shopping in stores, going to gyms or traveling.

Congressional leaders are considering a $748 billion relief package that would provide extended unemployment benefits, more loans for small businesses and possibly another round of stimulus checks for individual Americans.

Recent economic reports have generally reflected a sharply slowing recovery.

On Wednesday, the Commerce Department reported the sharpest drop in retail sales in seven months. Americans held back on spending in November at the start of the holiday shopping season, which typically accounts for a quarter or more of retailers’ annual sales.