Fed policy move will mean lower rates for even longer

Significance

The Fed reduced interest rates to 0-0.25% and almost doubled the size of its balance sheet to offset some of the impact of the COVID-19 pandemic on the US economy but clear signs of economic activity rebounding are now prompting the Fed to look further out.

Impacts

• The Fed will reassure markets that there will be no rate increases under virtually any circumstances in the next few years.
• Eventually the Fed will consider reducing the size of its balance sheet; this will require adroit management to avoid worrying investors.
• There appears to be little support at the Fed for negative rates; adopting yield-curve control remains possible if the recovery disappoints.