Fed tomeet after sharp changes to its outlook
Federal Reserve WASHINGTON— policymakers will meet thisweek for the first time since they significantly revised the Fed’s operating framework inways that will likely keepshort-terminterest ratesnear zero for years to come.
As a result, analysts expect the Fed will keep its benchmark rate unchangedafterthetwo-daymeeting that ends today. It has been pegged at nearly zero since March after the pandemic and the measures takentocontain it essentially shut down the economy.
But the statement that Fed policymakersreleasetodayisexpected to contain revisions that reflect the sweeping changes that Fed Chair Jerome Powell announced late last month in how the central bank operates. The Fed will also issue its quarterly economic projections, which will for the first time include estimates for growth, unemployment and the Fed’s benchmark interest rate for 2023.
Those projections may underscore how long the Fed expects to keep rates low. Analysts expect they will show that the Fed foresees keeping its benchmark rate at nearly zero through 2023.
Powell issued the Fed’s new framework at a virtual meeting of economists and central bankers last month. The changes are significant, though someanalysts have complained that details of how the changes will be implemented are lacking.
In one key shift, the Fedwill no longer followits longtime practice of raising its benchmark interest ratesimplybecausetheunemployment rate has fallen to a lowlevel that could spur inflation. Instead, it will wait for actual evidence prices are rising. That reflects a view among some high-ranking Fed officials that economic models it has used in past no longer reflect how the economy works.
Instead, low unemployment and even rising wages no longer necessarily push up inflation, Fed officials believe. With most consumers and businesses accustomed to mild price increases, they have adjusted their behavior in ways that act to keep inflation low. Businesses, for example, facing increased global competition, are less likely to pass on higher labor costs to customers.
Lael Brainard, a member of the Fed’sBoardofGovernors, said earlier thismonthif such apolicyhad beenin place in 2015, theFedlikely wouldn’t have started lifting rates thatyear. Manyeconomistsbelieve that 2015 hike pushedupthe value of the dollar, which increased the price of U.S. goods overseas and made imports cheaper, harming U.S. manufacturers.
The Fed also made a critical change to its 2% inflation target, which it formally set in 2012. The central bank now seeks inflation that averages 2% over a period of time, rather than a static target of 2% that ignores previous shortfalls.
This change reflects growing concern at the Fed that in recessions, inflation oftenfalls far below 2%, but itdoesn’tnecessarilyreach 2% when the economy is expanding and rarely tops it. Over time, that means inflation on average falls further from the target. As businesses and consumers come to expect increasingly lower inflation, they act inways that entrench lower prices, making it harder for the Fed to reach its target.
The Fed’s revised strategy statement nowsays that after inflation has run below 2%, the central bank “will likely aim to achieve inflation moderately above 2% for some time.”