The US Federal Reserve has decided to keep its benchmark rate unchanged in a range of 0.0 and 0.25 per cent. However, it has announced that there could soon be a slowdown in asset purchases. Professor Friedrich Heinemann, head of the ZEW Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, explains:

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

“The first contours of the Fed’s exit strategy are now becoming apparent. The reduction of asset purchases next year could be followed by first cautious interest rate hikes in 2023. It is not the currently very high inflation rate, but the rising medium-term inflation expectations that are decisive for the Fed to now embark on the long road towards normalisation. Many risks and possible setbacks lurk along this road. The conflict in Congress over raising the debt ceiling is a particularly acute risk in the short term. If US fiscal policy cannot deliver what it promises in terms of expansion due to a political deadlock, then monetary policy will have to step into the breach again.”

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The US Federal Reserve decided to leave its benchmark rate unchanged in a range between 0.0 and 0.25 per cent, and not yet expand its ongoing asset purchase programme any further. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, comments on this matter:

“The Fed is acting prudently and won’t allow itself to be pressured by the paralysis in US fiscal policy that has persisted since the presidential election. The message is that it is now Congress’ turn to respond to the coronavirus-related deterioration in the labour market. The contrast with the European Central Bank is remarkable. As in the US, fiscal policy in Europe is failing to gain momentum, and the effects of activating the EU coronavirus plan have been dragged out for months. However, unlike the Fed, the ECB immediately felt compelled to increase its bond purchases and to extend them at least until spring 2022. In this regard, the Fed remains much more cautious. The message is that US monetary policy is not falling into the trap of ‘fiscal dominance’.

Despite the very tense economic climate, the US Federal Reserve announced no further expansionary measures in its most recent interest rate decision on 5 November 2020. The federal funds rate is therefore left unchanged at a target range between 0.0 and 0.25 per cent. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim comments on this matter:

“The Fed is right to await the outcome of the US election thriller until the votes are counted and the disputes over the election results are resolved. Donald Trump and Joe Biden have very different stances on fiscal policy. Biden would most likely follow a more pro-active approach than Trump, which would assist the Fed in its responsibility of cushioning the economy from the effects of the coronavirus recession. The question of who will be the next president of the United States is therefore highly relevant for monetary policy. The outcome of the voters’ decisions and judicial rulings must be settled beyond doubt before the Fed can adopt new monetary policy measures.”

Despite the still very tense labour market situation, the US Federal Reserve announced no further expansionary measure in its most recent decision on 16 September 2020. The federal funds rate is therefore left unchanged at a target range between 0.0 and 0.25 per cent in September 2020. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, comments on this matter:

“The fact that the Fed decided against further expansionary measures in today’s meeting is not inconsistent with its new monetary policy strategy. This change in strategy signals a new course for future monetary policy. The message is that interest rates will remain low for several years, even if the inflation rate rises significantly. The Fed is hoping that this outlook in itself will achieve an expansionary effect. At the same time, the Fed prefers to put all monetary policy decisions on hold until after 3 November 2020, so as not to influence the presidential election.”

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.

“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.”

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 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.”

Date

22.09.2021

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