Fed Chairman Jerome Powell. (Photo: AP) Fed Chairman Jerome Powell. (Photo: AP)

The Federal Reserve on Wednesday reaffirmed its commitment to use “its full range of tools to support the U.S. economy in this challenging time” when the COVID-19 pandemic is “causing tremendous human and economic hardship across the U.S. and around the world.”

In its latest monetary meeting, Fed policymakers also agreed, in another unanimous decision, to leave the federal funds interest rate within a 0%-0.25% range.

The Fed’s monetary statement was almost word-for-word the same one it made in June except for the addition of one important line: “The path of the economy will depend significantly on the course of the virus.” 

“This isn’t news, but the fact it is explicitly stated now suggests that the forward path will directly depend on a cure or therapeutic solution for the virus,” said Eddy Vataru, portfolio manager of the Osterweis Total Return Fund. 

“It is such an important statement. It’s so fundamental,” said Powell, referring to the added sentence, in the Q&A portion of his press conference after the release of the Federal Open Market Committee statement.

Powell spoke about the “extraordinarily uncertain path for the economy” now that COVID-19 cases are rising quickly along with renewed policies to control it. He referenced recent signs of economic fallout, including declining credit card and debit card activity and slowing job growth among small businesses.

“This pandemic and its fallout is the biggest shock to the U.S. economy in living memory,” said Powell, noting that the U.S. unemployment rate went from the lowest on record in 90 years to the highest in just two months.

Need for More Fiscal Support

Federal emergency relief helped offset the impact of the shock, “keeping people in homes and businesses in business,” said Powell. “There will be a need for more support from us and from fiscal policy,” which is the purview of Congress. 

That statement was stronger than many previous ones that Powell has made about fiscal policy, since it excluded the word “may” before the word “need.” It comes at a time when Republican and Democratic lawmakers are hashing out the details of the next economic relief bill.

Powell said the gains in U.S. jobs between March and June that followed previous massive fiscal relief coupled with the Fed’s liquidity facilities and asset purchases helped reverse about a third of job losses and half the decline in consumer spending due to the pandemic, but there are signs of some reversals now. He referenced declining credit card and debit card activity and slowing job growth among small businesses.

“Fiscal policy can address the things we can’t address,” said Powell, repeating a mantra that the Fed makes loans not grants. He noted that “lending might not be the right answer for businesses” who don’t have much business.

“A lot of market pundits thought we’d see people getting back to work by this point, and that’s why the Fed is reiterating their concerns around the economy,” said Patrick Leary, chief market strategist and senior trader at Incapital.

“The employment data and economic data are horrific, and the Fed is shouting loud and clear that they are taking out the bazookas to fight,” says Terri Spath, chief investment officer of Sierra Investment Management.

Stocks rose on the Fed news, with the S&P 500 finishing 1.24% higher at 3,258 after some volatile trading and the U.S. dollar, which has turned lower recently, fell.

“The dollar index testing lows it hasn’t seen since 2018, Leary said. “Investors will continue to flock to the “easy money” trade” and “lower yields will continue to support equities, gold and silver.”

Before the Fed released its statement on Wednesday, it announced it is extending its temporary U.S. dollar swap lines and the temporary repurchase agreement facility for foreign and international monetary authorities through March 31, 2021. On Tuesday, the Fed announced it was extending its lending facilities through year-end.

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