Federal Reserve chair Jerome Powell. Picture: TASOS KATOPODIS/REUTERS
Federal Reserve chair Jerome Powell. Picture: TASOS KATOPODIS/REUTERS

New York — The Federal Reserve left interest rates near zero and signalled it would hold them there through at least 2023 to help the US economy recover from the coronavirus pandemic.

The Federal Open Market Committee (FOMC) “expects to maintain an accommodative stance of monetary policy” until it achieves inflation averaging 2% over time and longer-term inflation expectations remain well anchored at 2%, the central bank said in a statement on Wednesday after a two-day policy meeting.

The statement reflects the central bank’s new long-term policy framework in which officials will allow inflation to overshoot their 2% target after periods of underperformance. That shift was announced by Fed chair Jerome Powell in August at the central bank’s annual Jackson Hole policy conference.

“These changes clarify our strong commitment over a longer-time horizon,” Powell told a press conference after the decision.

Treasuries were little changed, with the 10-year yield steady at about 0.68% as investors digested the news. Stocks gained.

The vote, in the FOMC’s final scheduled meeting before the US presidential election on November 3, was 8-2. Dallas Fed president Robert Kaplan dissented, preferring to retain “greater policy rate flexibility”, while Minneapolis Fed president Neel Kashkari dissented in favour of waiting for a rate hike until “core inflation has reached 2% on a sustained basis”.

Powell and other Fed officials have stressed in recent weeks that the US recovery is highly dependent on the nation’s ability to better control the coronavirus, and that further fiscal stimulus is likely needed to support jobs and incomes.

Support economy

The Fed on Wednesday committed to using its full range of tools to support the economic recovery. The central bank repeated it will continue buying Treasuries and mortgage-backed securities “at least at the current pace to sustain smooth market functioning”.

A separate statement on Wednesday pegged those amounts at $80bn of Treasuries a month and $40bn of mortgage-backed securities.

Officials see rates staying ultra-low through 2023, according to the median projection of their quarterly forecasts, though four officials pencilled in at least one hike in 2023.

In other updates to quarterly forecasts, Fed officials see a shallower economic contraction in 2020 than before, but a slower recovery in the coming years.

“The recovery has progressed more quickly than generally expected,” Powell said, while cautioning that “the path ahead remains highly uncertain”.

In addition to slashing borrowing costs in March, the central bank has pumped trillions of dollars into the financial system through bond purchases and launched a slew of emergency lending facilities to keep businesses afloat.

The economy has partly recovered from the steepest downturn on record and some sectors such as housing are doing well, but Covid-19 continues to kill thousands of Americans each week, unemployment remains high and industries such as hospitality and travel are depressed.

Moreover, temporary extra jobless benefits are running out and the political stalemate over a new round of stimulus threatens to set back the economy. Uncertainty could hang over government policies at least until the outcome of the presidential and congressional elections is clear. Republicans including President Donald Trump — who trails challenger Joe Biden in national polls — have proposed a smaller package of aid than Democrats have.

Here are some highlights from the Fed’s latest forecast:

  • GDP: 3.7% contraction in 2020 (June estimate of 6.5% contraction); 4% growth in 2021
  • Fourth-quarter unemployment rate: 7.6% in 2020 (June estimate 9.3%), 5.5% in 2021
  • PCE inflation: 1.2% in 2020 (June estimate 0.8%), 1.7% in 2021
  • Longer-run federal funds rate: 2.5%, unchanged from in June.

Bloomberg 

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