The Federal Reserve reaffirmed Wednesday that it would do whatever was necessary to support an extremely weak economy suffering from the impact of the COVID-19 pandemic.
Just hours after the government reported first-quarter GDP falling 4.8% on an annualized basis — the biggest drop since 2008 — the Fed said it was “committed to using its full range of tools to support the U.S. economy in this challenging time.”
The Fed said it would maintain interest rates near zero — in the 0-0.25% range — “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”
The central bank also said it “will continue to purchase Treasury securities and agency residential and commercial mortgage-backed securities in the amounts needed to support smooth market functioning” and would “continue to offer large-scale overnight and term repurchase agreement operations,” all along closely monitoring market conditions and making adjustments “as appropriate.”
Major stock market indexes, which had been rallying for much of the day, retreated slightly after the Fed’s statement was released, then inched higher. At market close, the Dow was up 2.2%; the S&P 500, 3.1%; and the Nasdaq up 3.5%.
Treasury yields across most of the curve were mostly unchanged, near recent record lows.
The market shrug is not surprising since the Fed essentially just repeated its commitment to use “all its tools aggressively to restore the economy,” according to Jeff Kleintop, chief global investment strategist at Charles Schwab. “The fact that the Fed didn’t announce anything new may be a sign that they feel their programs targeting corporate debt and short-term funding have been working rather than that they believe they are out of ammunition.”
Jason Pride, chief investment officer of Private Wealth at Glenmede, said “The main message from the statement is that zero interest rates are here to stay for as long as the economy needs the support … There is no way around it — the economic impact will be ugly in the the short term.”
The Fed agrees. It noted in its statement that “the coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world. … The ongoing public health crisis will weigh heavily on economic activity, employment and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.”