U.S. Fed keeps interest rates near zero, likely to stay there until at least 2023
The U.S. Federal Reserve on Wednesday kept its benchmark interest rate unchanged at the record-low level of near zero and signaled to maintain this target range until at least 2023, noting that the path of the economy will depend significantly on the course of the coronavirus.
After conclusion of a two-day policy meeting, the Federal Open Market Committee (FOMC), the Fed's policy setting body, decided to keep the target range for the federal funds rate at 0 to 0.25 percent, a level that hasn't been changed since March.
The committee expects it will be appropriate to maintain this target range "until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time," according to the FOMC statement.
The policy meeting is the first since the central bank in late August adopted a new monetary policy framework, which seeks to achieve inflation that averages 2 percent over time.
Under the new framework, the Fed said, following periods when inflation has been running below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.
When asked to explain the specifics about inflation overshooting, Fed Chairman Jerome Powell said at a virtual news conference Wednesday afternoon that "we're resisting the urge to try to create some sort of a rule or a formula here."
"As widely expected, the Federal Open Market Committee made no substantive changes to its policy stance at today's meeting," Jay H. Bryson, chief economist at Wells Fargo Securities, wrote in an analysis, adding that the overall tone of the FOMC's statement was rather "dovish."
Powell told reporters the recovery has progressed more quickly than generally expected, but overall activity remains well below its level before the pandemic and the path ahead remains highly uncertain.
The central bank chief noted roughly half of the 22 million jobs that were lost in March and April have been regained as many people returned to work, and unemployment rate remained elevated at 8.4 percent as of August. He added that the level of unemployment is probably 3 percent higher than the official data, considering those people who are misidentified as employed and the declined labor force participation.
Looking ahead, the FOMC projected the unemployment rates to continue to decline, according to the latest economic projections. The median projection for unemployment rate is 7.6 percent at the end of this year, and 4 percent by the end of 2023. It's still above the historically low of 3.5 percent the country experienced before the COVID-19 pandemic.
Inflation, meanwhile, is expected to reach 1.2 percent by the end of this year, and will gradually pick up before reaching 2 percent by the end of 2023, the median projection showed.
Most Fed officials, 13 out of 17, expected interest rates to stay near zero over the next three years, even if inflation reaches 2 percent and the unemployment falls to around 4 percent.
"We look for rates of consumer price inflation to creep higher in coming quarters. That said, we generally expect that inflation will remain below 2 percent," Bryson said.
Noting that the FOMC may eventually feel compelled to provide more accommodation, Bryson said the committee could decide to dial up the rate of its asset purchases if inflation does not soon show signs of moving up toward 2 percent.
In the latest FOMC statement, the Fed said over coming months it will increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
Currently, the Fed is purchasing 80 billion dollars a month in Treasuries and 40 billion dollars a month in mortgage-backed debt.
Diane Swonk, chief economist at Grant Thornton, a major accounting firm, noted in a blog that the FOMC is concerned about both the course of the virus and the pace of the recovery, and members see the two as intertwined.
"This is what makes the resurgence in COVID cases over the summer so concerning," Swonk said. As of Wednesday afternoon, the United States has recorded more than 6.6 million confirmed COVID-19 cases and over 196,400 deaths, according to a tally of Johns Hopkins University.
"The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term," according to the FOMC statement.
As unemployment rate remains high, numerous small businesses are struggling, and state and local governments are in dire financial situation, more fiscal support is likely to be needed to support economic recovery, Powell said.
"It will take a while to get back to the levels of economic activity and employment that prevailed at the beginning of this year, and it may take continued support from both monetary and fiscal policy to achieve that," he said.