Fed expects to keep its key rate near zero through at least 2023
Federal Reserve officials signaled Wednesday that they are in no rush to dial back support for a U.S. economy still struggling amid the pandemic, releasing a fresh set of projections that showed the central bank’s policy interest rate on hold at near-zero for years to come even as growth is expected to pick up considerably in the near term.
The Fed slashed its policy interest rate — which guides borrowing costs throughout the economy — to rock bottom in March 2020 and chose to keep it there Wednesday, an effort to keep credit cheap and continue stoking growth. Analysts had expected the steady outcome but were closely watching the central bank’s fresh set of economic projections, which show officials’ anonymous estimates of how conditions will evolve through 2023 and in the longer run.
The new release showed that officials have become more optimistic about the outlook for growth, unemployment and inflation since their December estimates came out — but not to the point that they anticipate a wild overheating of the economy or expect to remove policy support rapidly. Most officials still see rates at rock-bottom over the next three years, meaning they are not penciling in a rate increase until at least 2024.
“No one should be complacent,” Jerome Powell, the Fed chair, said at a news conference Wednesday afternoon, noting that “the path ahead remains uncertain” and highly dependent on the virus.
Fed officials, in their post-meeting statement, noted that some parts of the economy had improved and Powell noted that participants pointed to vaccines and fiscal stimulus in revising up their economic expectations. But he noted that the unemployment rate remains elevated, and that millions of jobs are still missing.
“Indicators of economic activity
and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak,” the Fed said in its policy statement, reiterating that it is “committed to using its full range of tools” to bolster growth.
The Fed’s inflation estimates now suggest that price gains will pop this year, with the headline inflation index temporarily reaching 2.4 percent before easing to 2.1 percent by the end of 2023, at the same time as unemployment falls further and more quickly.
The improving job market will come alongside a rapid rebound in overall growth. Officials see economic output growing by 6.5 percent in the final three months of 2021 versus the same period last year, up from 4.2 percent growth in their December projections.
“You look at their economic forecasts, they are all better,” said Priya Misra, head of rates strategy
at TD Securities. “They’re telling the market that they will let inflation go above 2 percent.”
Since the Fed last updated its economic projections, Congress and the White House have passed two large spending packages — a $900 billion bill in December and another $1.9 trillion earlier this month. That huge infusion of government cash will put money in consumer bank accounts and could help to avert economic damage that Fed officials had worried about, like bankruptcies and evictions.
Americans are also receiving vaccinations at a steady pace, spurring hope that the pandemic might abate enough to allow hard-hit service industry companies to more fully reopen at some point this year.
Powell said his colleagues have been clear that they want to see a job market that is back at full employment and inflation that is
slightly above 2 percent and expected to stay there for some time before lifting interest rates.
In fact, there seemed to be a lot of consensus around leaving rates very low for a long time. Just seven officials penciled in rate increases by the end of 2023, while 11 saw that policy tool remaining on hold.
The Fed is also buying $120 billion in bonds per month — $80 billion in Treasury securities, plus $40 billion in mortgage-backed debt. It has been less clear about the criteria for slowing those purchases, saying that it needs to see “substantial” further progress before dialing them back.
Powell indicated Wednesday that the Fed was not ready to even start talking about when it might reduce that support.
“We’ll be carefully looking ahead,” he said. “When we see that we’re on track” then “we’ll say so, and we’ll say so well in advance of any decision to actually taper.”