Federal Reserver plans to keep rates at Zero

On Wednesday, The Federal Reservers vote to keep the rate unchanged and at zero until 2022. This is basically because of the current recession caused by the outbreak of coronavirus pandemic. The central bank repeated its commitment from the April meeting that it "expects to maintain this target 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."

In addition to the rate decision, the Along with the rate decision, central bankers projected that the economy will shrink 6.5% in 2020, an occurrence triggered by the unprecedented halting of business activity in an effort to reduce the spread of the coronavirus pandemic. However, by 2021 the economy is expected to show a 5% gain followed by 3.5% in 2022. It was also predicted by the body that unemployment would fall to 9.3% by the end of 2020 — down from over 13% in May — and to 6.5% by the end of 2021. 

In a statement on Wednesday, the Federal Reserve chairman Jerome Powell said “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."

“We are not even thinking about thinking about raising rates,” Federal Reserve chairman Jerome Powell confirmed. “There is great uncertainty about the future,” he said, reiterating that the central bank is strongly committed to doing “whatever we can, for as long as it takes” to help support the economy. “We’ve been very willing to adapt and will continue to be,” he said. “When the time comes, after the crisis has passed, we will put emergency tools back in the toolbox.”

Charlie Ripley, senior investment strategist for Allianz Investment Management added that “The Fed understands we are just in the beginning phases of the economic recovery and making rash changes to policy or forward guidance is premature at this time… As the economic recovery continues to take shape we expect monetary accommodation to be slowly trimmed back and better guidance around that should evolve in the coming months.”

Furthermore, the Fed Reservers revealed it will continue to increase its bond holdings currently aiming at a Treasury purchase of $80 billion a month and mortgage-backed securities at $40 billion.

Powell said the economic projections were made with the "general expectation of an economic recovery beginning in the second half of this year and lasting over the next couple of years, supported by interest rates that remain at their current level near zero."

What happens when the interest rate is zero?

A zero-interest-rate means the cost of borrowing is lowered. A simpler way to put it is that the lending interest rate is low or at zero. As a result, it’s much easier to borrow because the rate on the borrowed amount will be affordable.  This can then encourage more spending on business capital, investments, and other forms of spending. Also, it can help create more jobs. 

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