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Fed will keep rates near zero until economy has ‘weathered’ coronavirus impact, minutes show

Federal Reserve policymakers at their March 15 meeting indicated that not only did they consider it important to use all their rate power now, but also that they intend to keep rates anchored at the bottom for the foreseeable future, according to minutes released Wednesday.

The minutes reflected central bankers concerned about the impact the coronavirus was having on the economy.

“All participants viewed the near-term U.S. economic outlook as having deteriorated sharply in recent weeks and as having become profoundly uncertain,” the minutes said.

The meeting, held remotely on a Sunday afternoon, resulted in the committee taking down its policy rate to where it was during the financial crisis. All but one member voted in favor, with Cleveland Fed President Loretta Mester offering dissent.

“In their discussion of monetary policy for this meeting, members noted that the coronavirus outbreak had harmed communities and disrupted economic activity in many countries, including the United States, and that global financial conditions had also been significantly affected,” the minutes said.

“Members judged that the effects of the coronavirus would weigh on economic activity in the near term and would pose risks to the economic outlook. In light of these developments, almost all members agreed to lower the target range for the federal funds rate to 0 to 1/4 percent,” the summary continued.

The decision also included a nod to the “forward guidance” the Fed uses to indicate the future path of policy. Market participants had been looking for whether the meeting summary would show an intent to keep the fed funds rate at its lowest level.

“With regard to monetary policy beyond this meeting, these participants judged that it would be appropriate to maintain the target range for the federal funds rate at 0 to ¼ percent until policymakers were confident that the economy had weathered recent events and was on track to achieve the Committee’s maximum employment and price stability goals,” the minutes said.

‘Whatever it takes’ approach

Mester said in a statement after the meeting that she voted no because she wanted to give the Fed more flexibility with policy. The central bank already had approved an emergency 50 basis point cut two weeks prior to the meeting.

The minutes indicated that Mester wanted a 50 basis point cut rather than the 75-point reduction approved. She felt that “further cuts in the target range … could be implemented when market conditions had improved enough to ensure that the monetary policy transmission mechanism was functioning,” the minutes said.

The release also included a summary of deliberations from an unscheduled May 3 meeting at which the Federal Reserve’s policymaking group announced a 0.5 percentage point rate cut.

In total, the minutes point to a Fed taking a “do whatever it takes” approach to monetary policy, said Bob Miller, head of Americas fundamental fixed income for asset management giant BlackRock. 

“We expect the FOMC will do what is necessary to maintain accommodative financial conditions for the balance of this year.” Miller said. “This includes the purchase of U.S. Treasuries in the amounts needed to prevent any meaningful backup in yields from the coming Treasury issuance.”

Indeed, along with zero interest policy the Fed has expanded its asset purchases from an original target of $700 billion to an unspecified level so long as they’re needed to keep markets functioning and economy afloat. Miller said he expects the Fed balance sheet, currently just shy of $6 trillion, to expand to $10 trillion or more.

Though the market has come to view the asset purchases akin to financial crisis-era quantitative easing, Fed officials stressed during the meeting that their role was to support market functioning.

Policymakers did, though, express concern about the economy’s future trajectory. 

“Participants noted that the timing of the resumption of growth in the U.S. economy depended on the containment measures put in place, as well as the success of those measures, and on the responses of other policies, including fiscal policy,” the minutes said.

The Fed has instituted a series of other programs since the meeting aimed at getting money to businesses and individuals. It also is expected soon to announce more details for a Main Street lending program to medium-sized firms.

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