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Fed Sees Rates Near Zero Through 2023 09/17 06:11
WASHINGTON (AP) -- With the economy still struggling to recover from the
pandemic recession, Federal Reserve policymakers signaled Wednesday that their
benchmark short-term interest rate will likely remain at zero at least through
2023 and possibly even longer.
Fed chair Jerome Powell said at a press conference that while the economy
has rebounded more quickly than expected, the job market is still hurting and
the outlook is uncertain. The unemployment rate has fallen steadily since the
spring but is still 8.4%.
"Although we welcome this progress we will not lose sight of the millions of
Americans that remain out of work," Powell said.
The Fed left its benchmark interest rate unchanged at nearly zero, where it
has been pegged since the virus pandemic intensified in March. The rate
influences borrowing costs for homebuyers, credit card users, and businesses.
Fed policymakers hope an extended period of low interest rates will encourage
more borrowing and spending, though their policy also carries the risk of
inflating a bubble in stocks or other financial assets.
Fed officials said in a set of quarterly economic projections that they
expect to keep rates at zero through 2023. And in a statement released after
its two-day meeting, the Fed said it wouldn't raise borrowing costs until
inflation has reached 2% and appears likely to "moderately exceed" that level
for an extended period.
The Fed's projections show that policymakers don't expect inflation to hit
that target until the end of 2023.
"The Fed is now more dovish, by a long shot, than it has ever been," said
Stephen Stanley, chief economist at Amherst Pierpont. Dovish means keeping
borrowing costs low to support more hiring.
On Wall Street, stocks initially got a short boost from the Fed's actions
before turning lower. The S&P 500 fell 0.5%. Still, some market analysts liked
what they heard from the Fed.
"A better economy and a dovish Fed, that is a nice combo," said Ryan
Detrick, chief market strategist for LPL Financial.
But many analysts were disappointed the Fed was not more specific about how
long it wanted inflation to stay above 2%, one likely reason that the stock
market ultimately fell.
Carl Tannenbaum, chief economist at Northern Trust, said the Fed will likely
keep rates at nearly zero for at least five years. The Fed held its rate that
low for seven years during and after the 2008-2009 recession.
The Fed ultimately first hiked rates in December 2015, when the unemployment
rate was 5%. On Wednesday, the Fed projected that it will keep rates at zero in
2023 even as it forecasts unemployment will fall to 4%.
Powell said the Fed's benchmark rate will stay low "until the expansion is
well along, really very close to our goals and even after."
The Fed has significantly altered its inflation goal, from simply reaching
to 2% to pushing inflation above that level so that it averages 2% over time.
That is intended to offset long periods of inflation below that level.
If businesses and consumers come to expect increasingly lower inflation,
they act in ways that entrench slower price and wage gains, which can be a drag
on economic growth.
Powell reiterated his support for more spending by Congress to help the
economy recover. Congress is deadlocked on more financial relief because of
disagreements on the size of the package between Democrats and Republicans.
Some earlier measures aimed at helping consumers, such as an extra $600 in
unemployment benefits, have expired.
"My sense is that more fiscal support is likely to be needed," Powell said.
The Fed also said Wednesday that it will continue purchasing about $120
billion in Treasurys and mortgage-backed securities a month, in an effort to
keep longer-term interest rates low. Since March, the Fed has flooded financial
markets with cash by making such purchases and its balance sheet has ballooned
by about $3 trillion.
The Fed announced a broad update to its overall strategy last month, in
which it said that its goal of reaching "maximum employment" is "a broad and
inclusive goal."
Powell said Wednesday that Fed will consider the unemployment rate for
Blacks and other disadvantaged groups when it makes its interest-rate
decisions. Activists have argued that in the past the Fed has hiked rates when
joblessness among African-Americans was still too high. Democrats in Congress
have introduced legislation to require the Fed to take unemployment rates for
different groups into account.
"If we want to have the highest potential output and the best output for our
economy we need that prosperity to be very broadly spread in the longer run,"
he said.
On Wednesday, the latest economic report seemed to support Powell's view of
an economy on the mend but not fully healthy. The Commerce Department said
retail sales rose 0.6% in August, the fourth straight gain but the slowest
since sales started growing again in May. The figure suggests that the end of
the extra $600 in unemployment benefits weighed on spending.
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