Interest rates could stay low through ’23

WASHINGTON — The Federal Reserve expects to keep its benchmark interest rate pegged near zero at least through 2023 as it strives to accelerate economic growth and drive down the unemployment rate.

The central bank also said Wednesday that it will seek to push inflation above 2% annually. The Fed left its benchmark short-term rate unchanged at nearly zero, where it has been since the pandemic intensified in March.

The Fed’s benchmark interest rate influences borrowing costs for homebuyers, credit card users and businesses. Fed policymakers hope an extended period of low interest rates will encourage more borrowing and spending, though their new policy also carries risks of inflating stock or causing other financial market bubbles.

The Fed’s moves are occurring against the backdrop of an improving yet still weak economy, with hiring slowing and the unemployment rate at 8.4%. The central bank did note some improvement in the economy, however, forecasting that GDP would fall by 3.7% compared to a June forecast of a 6.5% drop. On employment, the Fed projected an unemployment rate at the end of the year of 7.6% instead of the 9.3% it projected in June.

At a virtual conference with reporters following the statement, Powell said the economic outlook still remains highly uncertain and depends heavily on the ability of the U.S. to get control of the pandemic.

“A full economic recovery is unlikely until people are confident that it is safe to re-engage in a wide variety of activities,” Powell said.

The Fed’s statement formalized a change in its policy toward inflation. Fed chair Jerome Powell first said last month that the Fed would seek inflation above 2% over time, rather than just keeping it as a static goal.

The Fed said that because inflation has mostly fallen below its target of 2% in recent years, Fed policymakers now “will aim to achieve inflation moderately above 2 percent for some time.” It also says it will keep rates at nearly zero until “inflation has risen to 2% and is on track to moderately exceed 2% for some time.”

The change reflects a growing concern at the Fed that in recessions, inflation often falls far below 2%, but it doesn’t necessarily reach 2% when the economy is expanding. Over time, that means inflation on average falls further from the target. As businesses and consumers come to expect increasingly lower inflation, they act in ways that entrench slower price gains.

The Fed prefers a little inflation because that gives the central bank more room to cut or raise short-term interest rates.