Fed set to keep interest rates near zero until at least 2023
The Federal Reserve kept interest rates pinned near zero on Wednesday (US time) and promised to keep them there until inflation is on track to "moderately exceed" the US central bank's 2 per cent inflation target "for some time."
The change in guidance is part of a monetary policy shift announced by the Fed last month that is aimed to offset years of weak inflation and allow the economy to keep adding jobs for as long as possible. But it came at the cost of two dissents, one from a policymaker who thought it went too far, and the other from one who thought it didn't go far enough.
Jerome Powell, chair of the Fed. New economic projections released with the policy statement showed interest rates on hold through at least 2023, with inflation never breaching 2 per cent over that time.Credit:Bloomberg
In its policy statement, the Fed also began to pivot from stabilising financial markets to stimulating the economy: the Fed said it would keep its current government bond-buying at least at the current pace of $US120 billion ($164 billion) per month, but described the goal as in part to ensure "accommodative" financial conditions in the future.
US stocks added to earlier gains after the release of the Fed statement, while yields on longer-dated Treasury securities edged higher. The dollar firmed slightly against a basket of major trading partner currencies. In late trade, the Dow Jones is up 0.8 per cent, the S&P 500 has gained 0.2 per cent and the Nasdaq has slid 0.4 per cent. Futures at 4.58am AEST are pointing to a gain of 9 points, or 0.2 per cent, at the open for the ASX.
The coronavirus epidemic continued to weigh on the economy, the Fed said in the statement, released after the end of its latest two-day policy meeting, even as officials upgraded their immediate outlook for the economy.
The virus "is causing tremendous human and economic hardship," the rate-setting Federal Open Market Committee said. "The Federal Reserve is committed to using its full range of tools to support the US economy in this challenging time."
New economic projections released with the policy statement showed interest rates on hold through at least 2023, with inflation never breaching 2 per cent over that time. Policymakers saw the economy shrinking 3.7 per cent this year, far less than the 6.5 per cent decline forecast in June, and unemployment, which registered 8.4 per cent in August, was seen falling to 7.6 per cent by the end of the year.
All Fed policymakers saw rates staying where they are through 2022, with four eying the need for an increase in 2023.
But in pledging to keep rates low until inflation was moving above the 2 per cent target, to make up for years spent below it, the Fed reflected its new tilt towards stronger job growth, announced late last month after a nearly two-year review.
Both dissenters to the statement, Dallas Fed President Robert Kaplan and Minneapolis Fed President Neel Kashkari, took specific issue with the central bank's guidance that it would keep interest rates where they are "until labour market conditions have reached levels consistent with … maximum employment and inflation has risen to 2 per cent and is on track to moderately exceed 2 per cent for some time."
Kaplan said he would have preferred to have "greater flexibility" once inflation and maximum employment were on track to reaching the Fed's goals, an easier hurdle to reach. Kashkari's dissent suggests he wanted a higher hurdle: for rates to stay where they are until core inflation – which often runs cooler than overall inflation – has reached 2 per cent "on a sustained basis."
Fed Chair Jerome Powell began a virtual news conference shortly after the release of the policy statement and economic projections.
More to come
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