Fed extends swap lines and warns of slowing United States economy

Andrew Cummings
August 2, 2020

High-frequency economic indicators are pointing to a stall in the USA economic rebound as consumers hold back from activities like dining out and air travel.

The FOMC made no changes to policy rates or its asset-purchasing programme, but warned the United States economic recovery is slowing as Covid-19 cases increase.

The Fed's policy statement on Wednesday directly tied the economic recovery to resolution of a health crisis whose direction remains much in doubt.

There is also a worry Powell's calls for more government aid to help the economy might not be heeded by lawmakers in Washington, who remain poles apart as they try to hammer out a new stimulus.

"But they can't tame the virus or manufacture demand, and that's what the economy desperately needs in order to bounce back", he said.

"That data shows that on balance. the pace of the recovery looks like it has slowed since cases began that spike", he said.

Gold prices gained in volatile trade overnight, nearing the last session's record peak at one point, after the US Federal Reserve vowed to keep interest rates near zero as the rapid rise in coronavirus cases dampens hopes for an economic recovery.


Both types of swap line will now run until March 31 next year, the Fed announced at the end of the July 28 and 29 Federal Open Market Committee meeting.

The policymakers voted unanimously to hold rates steady between a range of 0pc and 0.25pc and reiterated their pledge to use their "full range of tools to support the U.S. economy".

The vote, to leave the federal funds target rate in a range of 0 per cent to 0.25 per cent, was unanimous.

The dollar extended its decline Wednesday, while US stocks maintained their gains and gold remained buoyant.

The US dollar fell to a two-year low and was on course for its worst month in a decade, making bullion cheaper for investors holding other currencies.

"The most notable thing is the statement that the path of the economy will depend on COVID-19".

A Fed statement said there were signs of an economic pick up recently. We know that this virus is unpredictable.


Fed officials had been expected to spend some of their meeting debating whether and how to strengthen their so-called forward guidance, perhaps by promising there would be no changes to interest rates until the unemployment and inflation rates meet explicit benchmarks.

Observers said focus now turns to the next policy meeting in September, which could see more measures unveiled.

The Fed also said it will continue to buy at least $120 billion in U.S. Treasuries and mortgage-backed securities each month to steady financial markets.

"Since the Fed last met, the U.S. economy has been treading water and there has been a resurgence in the virus".

But, while traders have a mountain of cash from governments and central banks around the world backing them up, the disease continues to dominate as the USA reached 150,000 deaths and Australia's state of Victoria recorded a record number of new infections.

Job growth, which had been unexpectedly strong in May and June, now appears to be slowing.


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