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Fed officials expect that coronavirus will ‘weigh heavily’ on the economy, minutes show

The Federal Open Market Committee released minutes Wednesday from its July policy meeting.

At the July 28-29 session, the Federal Reserve’s policymaking arm voted to keep short-term interest rates anchored near zero, citing an economy that was falling short of its pre-pandemic levels. 

Officials at the meeting “agreed that the ongoing public health crisis would weigh heavily on economic activity, employment, and inflation in the near term and was posing considerable risks to the economic outlook over the medium term.”

Because of how much impact the virus will have on the economy, FOMC members asid they expect to hold the current overnight borrowing rate to a range of 0%-0.25% until they’re “confident that the economy had weathered recent events and was on track to achieve the Committee’s maximum employment and price stability goals.”

U.S. gross domestic product tumbled at a rate of 32.9% in the second quarter as the pandemic shut down most nonessential activities. A return to growth is expected in the third quarter, though a resurgence in the virus is casting some doubt on how aggressive the bouneback might be.

Along with concerns about general growth, members said they worried about risks to the financial system. 

Though Chairman Jerome Powell and other Fed officials repeatedly have said banks an related institutions are in generally strong shape, committee members at the meeting said they worried about whether that might change if the virus spread persists and “more adverse” scenarios about the future took hold.

In addition to looking for the reasons behind the policy decisions investors were focused on any clues about enhanced “forward guidance,” or the parameters for future rate action, and the possibility of using bond purchases to control government bond yields.

On the issue of yield caps, officials continued to voice skepticism about its usefulness.

“Of those participants who discussed this option, most judged that yield caps and targets would likely provide only modest benefits in the current environment, as the Committee’s forward guidance regarding the path of the federal funds rate already appeared highly credible and longer-term interest rates were already low,” the minutes said.

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