Fed keeps rate near zero, sees rosier outlook in ’21

WASHINGTON — 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 long-term 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 projections Wednesday, though, Fed officials painted a brighter picture of the economy next year, compared with its last projections in September. The improvement likely reflects the expected impact of the new coronavirus vaccines. The Fed now expects the unemployment rate to fall from the current 6.7% to 5% by the end of 2021.

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.

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.

Chair Jerome Powell and many other Fed officials have repeatedly urged Congress to approve more economic aid to carry the economy through what’s expected to be a financially painful winter, with cold weather foreclosing outdoor dining and rising virus cases discouraging many Americans from shopping in stores, going to gyms or traveling.

Congressional leaders are considering a $748 billion relief package that would provide extended unemployment benefits, more loans for small businesses and possibly another round of stimulus checks for individual Americans.

Providing a more specific timeline ensures that financial markets will not anticipate an earlier reduction in bond purchases that could cause investors to push up rates earlier than the Fed wants. Longer-term rates reflect investor expectations for future borrowing costs. So reducing expected future rates keeps current rates lower.

“It’s helpful to be as clear as you can be about your intentions,” said Bill English, a former Fed official who teaches finance at the Yale School of Management.

Some economists had expected the Fed to announce a shift in its bond purchases by buying more longerterm bonds and fewer shorter-term securities — a step they could still take in the future.