Fed keeps rate near zero but sees brighter economy in 2021
WAS INTTON >> The Federal Reserve said Wednesday that it will keep buying government bonds until the economy makes “substantial” progress — a step intended to reassure financial markets and keep longterm borrowing rates low indefinitely.
The Fed also reiterated after its latest policy meeting that expects keep its short-term benchmark interest rate near zero through at least 2023. The Fed has kept its key rate there since March, when it took a range of extraordinary steps to fight the pandemic recession by keeping credit flowing.
In a series of economic p r o j e c t i o n s We d n e s - day, though, Fed officials painted a brighter picture for next year, compared with its previous projections in September. The improvement likely reflects the expected impact of new coronavirus vaccines. The policymakers now foresee the economy contracting 2.4% this year, less than the 3.7% decline it envisioned in September. For next year, in anticipation of a rebound, the officials have upgraded their growth forecast from 4% to 4.2%.
By the end of 2021, the Fed expects the unemployment rate to fall to 5% from the current 6.7% — lower than the 5.5% rate it had forecast in September.
The Fed’s latest policy statement coincides with an economy that is stumbling and might even shrink over the winter as the raging pandemic forces new business restrictions and keeps many consumers at home. Weighing the bleak short-term outlook and the brighter long-term picture has complicated the Fed’s policymaking as it assesses how much more stimulus to pursue.
At a news conference, Fed Chair Jerome Powell acknowledged that challenge. While the economy and job market should rebound strongly in the second half of 2021, he said, “the issue is the next four to five months” as the virus keeps weakening growth.
Powell also noted, as he often has before, that the pandemic recession has fallen most painfully on the most disadvantaged American households.
“Economic dislocation has upended many lives and created great uncertainty about the future,” Powell said.
With its benchmark rate already near zero, the Fed has turned to bond purchases, buying $80 billion of Treasury securities and $40 billion of mortgage-backed bonds a month. Those moves indirectly lower rates on mortgages, auto loans and credit cards, with the aim of encouraging more borrowing and spending.
Before Wednesday, the Fed had given no guidance on how long it would buy Treasury and mortgage bonds. Saying it wants to await “substantial” economic progress suggested that the central bank envisions a lengthy time frame for those purchases.