The “Federal” Reserve concluded its last meeting before the November election, on Wednesday, by pledging to keep interest rates near zero until 2023. As the central bank looks to continue to support the U.S. economic recovery out of the inevitable recession, that was sparked by the coronavirus pandemic.
The Federal Reserve has so far taken unprecedented steps to support the economy through the coronavirus pandemic. The central bank has created and pumped trillions of dollars into the financial system through bond purchases and a slew of emergency lending facilities to keep businesses afloat.
Although the economy has partially recovered from its steepest downturn ever, emergency unemployment benefits have started to run out, people rent is backed up, evictions are piling up at courthouses, and much-needed additional stimulus from Congress looks to be stuck in a political stalemate.
In addition, officials addressed a new policy regime in which the Fed will allow inflation to run somewhat above the 2% target rate before hiking rates to control inflation.
“These changes clarify our strong commitment over a longer time horizon,” Chairman Jerome Powell said at his post-meeting news conference.
The policymaking Federal Open Market Committee adopted specific language to emphasize the inflation goal.
“With inflation running persistently below this longer run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved,” the post-meeting statement said.
The committee added that “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.”
Stocks added to gains following the Fed release, though government bond yields were little changed.
“The guidance was a little more explicit than perhaps I would have thought, but the outcome is the same,” said Kathy Jones, head of fixed income for Charles Schwab. “We’re still looking at the probability of zero interest rates at least through 2022 and median estimates for 2023, although there were a few who think that liftoff happens in 2023.”
Powell called the forward guidance “powerful” and said the committee feels “rates will remain highly accommodative until the economy is far along in this recovery.”
In addition to the rates decision, the committee altered its outlook for GDP, unemployment and inflation for the coming years.