Fed signals rates to stay near zero for at least three years
The Federal Reserve left interest rates near zero and signalled it would hold them there through at least 2023 to help the U.S. economy recover from the coronavirus pandemic.
The Federal Open Market Committee “expects to maintain an accommodative stance of monetary policy” until it achieves inflation averaging two per cent over time and longer-term inflation expectations remain well anchored at two per cent, the central bank said in a statement Wednesday following a two-day policy meeting.
The statement reflects the central bank's new long-term policy framework in which officials will allow inflation to overshoot their two-percent target after periods of underperformance. That shift was announced by Fed chairman Jerome Powell last month at the central bank's annual Jackson Hole policy conference.
“This very strong, very powerful guidance shows both our confidence and our determination,” Powell told a press conference following the decision. “We're strongly committed to achieving our goals and the overshoot.”
Treasuries were little changed, with the 10-year yield steady at about 0.69 per cent as investors digested the news. Stocks gained.
The vote, in the FOMC's final scheduled meeting before the U.S. presidential election on Nov. 3, was 8-2. Dallas Fed president Robert Kaplan dissented, preferring to retain “greater policy rate flexibility,” while Minneapolis Fed president Neel Kashkari dissented in favour of waiting for a rate hike until “core inflation has reached 2 per cent on a sustained basis.”
Powell and other Fed officials have stressed in recent weeks that the U.S. recovery is highly dependent on the nation's ability to better control the coronavirus, and that further fiscal stimulus is likely needed to support jobs and incomes.
The Fed on Wednesday committed to using its full range of tools to support the economic recovery. The central bank repeated it will continue buying Treasuries and mortgage-backed securities “at least at the current pace to sustain smooth market functioning.” A separate statement on Wednesday pegged those amounts at US$80 billion of Treasuries a month and US$40 billion of mortgage-backed securities.
Officials see rates staying ultra-low through 2023, according to the median projection of their quarterly forecasts, though four officials pencilled in at least one hike in 2023.
In other updates to quarterly forecasts, Fed officials see a shallower economic contraction this year than before, but a slower recovery in the coming years.
Powell said that fiscal measures taken early in the crisis were a big help and more was probably needed.
“The overwhelming majority of private forecasters who project an ongoing recovery are assuming there will be additional substantial fiscal support,” he said, noting around 11 million Americans remain out of work and will require further assistance.