As expected, the US Federal Reserve left the target range for the federal funds rate unchanged between 0.0 and 0.25 per cent. In addition, it will continue its large-scale bond purchases and direct lending to the corporate sector. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim comments on this matter.

ZEW economist Friedrich Heinemann comments on the Fed's decision to leave its key rates unchanged.
Professor Friedrich Heinemann, head of the ZEW Research Department “Corporate Taxation and Public Finance”, on the Fed's interest rate decision and US economy.

“The Fed moves with caution, as concerns over the very high number of COVID-19 infections put an end to the hope of a speedy recovery of the US economy. As the Fed rightly knows, there is no hope that the weak dollar will be able to make a significant contribution during this phase. As global trade collapses and the trade dispute between China and the US continues to escalate, the depreciation of the US dollar will not be able to spur US exports. However, the Fed still has much room for manoeuvre: Its balance sheet of 32 per cent of total US economic output remains well below that of the ECB, which is already at 53 per cent of the EU GDP.”

Previous Comments

Weak Remedy for the Economic Virus (3. March 2020)

Weak Remedy for the Economic Virus (3. March 2020)

The US Federal Reserve surprisingly lowered its federal funds rate by 0.5 percentage points to a range of 1–1.25 per cent. With this move, the Fed is reacting to the risks that the coronavirus poses to the US and global economy. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, comments on this matter. 

“It is understandable that the Fed is now reacting. Also, unlike the European Central Bank, it still has room for manoeuvre in its interest rate policy. Nevertheless, new interest rate cuts are a weak remedy for the economic virus. This is particularly true for Europe, where it is no longer possible to administer a significant rate cut dose given the already very negative interest situation. What’s needed here is for fiscal policymakers to step in. Particularly countries like Germany with considerable fiscal leeway should now be quick to prepare cleverly designed economic stimulus packages. Not only do the manufacturing and service industries, but also private consumption need effective economic support in these times of virus panic.”

Fed Refuses to Provide Campaign Assistance to Trump (29. January 2020)

Fed Refuses to Provide Campaign Assistance to Trump (29. January 2020)

As expected, the US Federal Reserve left the target range for the federal funds rate unchanged between 1.5 and 1.75 per cent in its latest decision in January 2020. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, comments on this matter.

“After last year’s three rate cuts, the Fed is now taking a wait-and-see approach. Given the excellent labour market situation and solid growth with a renewed rise in inflation, there is no reason for a further interest rate cut for the time being. Especially in the presidential election year, the benefits of a central bank’s independence are once again clearly evident. For his election campaign, US President Trump would now, of course, like to see a strong economic flash in the pan, induced by monetary policy. Jerome Powell and the majority on the Federal Open Market Committee will refuse to provide such campaign assistance. The fact that Trump now wants to put two monetary policy doves on the committee won’t help either. Experience shows that political candidates are likely to be socialized quickly by their Fed colleagues.”

The Fed Cannot Compensate for an Irresponsible Economic Policy (18. September 2019)

The Fed Cannot Compensate for an Irresponsible Economic Policy (18. September 2019)

The US Federal Reserve continued the series of interest rate cuts it started in July 2019 and lowered its base rates by a further 0.25 percentage points to a range between 1.75 and 2.00 per cent. Professor Friedrich Heinemann, head of the “Corporate Taxation and Public Finance” Research Department at the ZEW – Leibniz Centre for European Economic Research in Mannheim, comments on this matter.

“Unlike in Europe, the main reason for the central bank’s new expansionary policy is not the development of inflation, but the significant slowdown of the US economy. This is due to the trade conflict with China and the end of the short-lived enthusiasm about Trump’s 2018 tax reform. With its efforts to stimulate the US economy, the Fed, which has been a frequent target of Trump's criticism, will now, rather ironically, become his most important helper in his re-election campaign. But what is true for Europe also applies to the US: the central bank cannot compensate for the damages caused by an irresponsible economic policy. The US economy will not get back on its feet through further interest rate cuts. Instead, more responsible action from the White House is needed.”