US GDP collapses, the Federal Reserve tries to save the US economy

The US GDP in the second quarter fell by 31.7%: less than expected (analysts had estimated a drop of 32.9%) but still a very strong collapse. New subsidy requests for the unemployed are down slightly, but more than a million remain in a week. The Federal Reserve confirms the expansionary monetary policy but changes its direction: employment becomes the main data for decisions on rates, the central bank has decided that rates will remain low even if inflation will exceed 2%.

federal reserve us economy

US GDP collapses, applications for unemployment benefits still over 1 million a week

The American economy in the second quarter contracted by 31.7% compared to the same period of the previous year. This is the second estimate on the GDP trend between April and June, slightly better than the -32.9% of the first survey and compared to the expectations of analysts, who bet on a contraction of 32.5%. But it’s still an unprecedented collapse.

Meanwhile, requests for unemployment benefits last week fell by 98,000 units, remaining however at 1.01 million. The slight decline in initial grant applications is seen as a positive sign, but prior to the pandemic, applications never exceeded 700,000 per week. The total number of unemployed with the benefit in the week ending August 15 was 14.5 million, 223,000 fewer than the previous week. The four-week moving average is 15.1 million, down by 604,000 from the figure calculated the week before.

The Federal Reserve will keep rates to a minimum even if inflation rises, focus on the unemployment rate

In this context, the Fed has given a change to its monetary policy, opening up the possibility of leaving interest rates low even if inflation exceeds 2%. The attention of the US Federal Reserve, from now on, will focus more on the performance of the labor market. The decision was made by the Federal Open Market Committee – the committee that adopts monerary policy decisions – and confirmed by President Jerome Powell at the opening of his speech at the annual Jackson Hole conference, which this year takes place via videoconference.

As in the market forecasts, the US central bank has kept interest rates steady in the range between 0 and 0.25%: according to the statement, rates will remain steady until the monetary policy institute is “sure that the economy is on track to achieve its maximum employment and price stability targets”.

In addition to keeping rates at zero, the Federal Open Market Committee has expressed its commitment to continue with the bond purchases and loan and liquidity programs necessary to restart the US economy, fall into recession due to the Covid pandemic. A taste of the Fed’s commitment came the day before, when the US central bank extended its massive lending plan to the economy by three months until December 31, 2020. The deadline was previously set for 30 September.

The Federal Reserve also announced the extension of nine swap line agreements with as many central banks until March 31, 2021. The agreements concern liquidity lines of up to $ 60 billion each with the central banks of Australia, Brazil, Korea, Mexico, Singapore and Sweden. The other three agreements, worth a maximum of 30 billion dollars, are instead with the central banks of Denmark, Norway and New Zealand.

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