The Federal Reserve lowered interest rates to zero to help maintain the economy and alleviate unemployment. It has no intention of going to negative interest rates to drive the stock market to new highs, while 40+ million people are unemployed.
The Federal Reserve did what was expected on Wednesday; it did not change interest rate policy. While the Federal Reserve is not supposed to be worrying about the stock market being up or down, it knows the rally that has occurred is dangerous; it’s focused on speculation, not fundamentals. Moving to negative interest rates would only serve to create a bigger bubble.
The Fed’s dot plot, however, showed the central bank isn’t planning to lift interest rates through 2022. Hopefully, the economy will heal over the next two years enough that the fundamentals underpinning stock valuations recover to prevent a stock market crash once the Federal Reserve starts to raise interest rates.
The Fed also kept its bond-purchase program unchanged for the time being. If the trade war with China expands, the Federal Reserve may have to adjust its program if the Chinese start dumping the U.S. Dollar.
Vincent Reinhart, a former Fed official, and chief economist at Mellon pointed out that the Fed surprised him, however, with two decisions…
- The Federal Open Market Committee did not move its longer-run assessments of real gross domestic product growth, the unemployment rate, and the equilibrium real fed-funds rate. Powell’s explanation for that was that it was just too soon to evaluate the longer-term impact of COVID-19 on the U.S. economy.
- The other surprise, Reinhart pointed to the fact that the Fed published a dot plot at all.