Fed pledges to keep interest rates near zero for years
The Federal Reserve committed Wednesday to do more to help the US economic recovery, promising more asset purchases and lower interest rates for even longer than it previously expected.
The Federal funds rate remained unchanged at zero to a quarter percentage point, and will stay there until America’s labor market has recovered “consistent with the Committee’s assessments of maximum employment” and the inflation rate has risen to 2%, and is on track to exceed that level for some time.
Given the country is still down 11.5 million jobs since February and the consumer price inflation rate over the past 12 months stood at 1.3% last month, this seems like a long way off.
A survey of Fed officials showed the group expects rates to remain at or near zero through 2023 — a year later than the previous survey conducted in June.
It was the central bank’s first monetary policy update since announcing changes to its framework in July following an 18-month review. Under the new strategy, the Fed will favor maximizing employment over regulating spikes in inflation. It still targets 2% inflation, as it has for decades, but it won’t hike interest rates quite as quickly in the future to counteract inflation spikes.
On top of that, the central bank will buy more Treasury securities and mortgage-backed securities over the next several months to keep markets functioning and keep financial conditions smooth.
The Fed had some optimistic news to report: It updated its economic projections, and the picture seems to have improved. For example, the central bankers expect a median 7.6% unemployment rate for 2020, down from the 9.3% forecast in June. And projections for gross domestic product — the broadest measure of the economy — are now for a 3.7% decline for the year, a smaller contraction than the from 6.5% decline expected in June.
While most members of the Federal Open Market Committee voted in favor of the decision, there were two dissenters: Dallas Fed President Robert Kaplan thinks the Fed should reconsider rates when its members are confident that the economy has weathered the storm and is on the path higher. Meanwhile, Minneapolis Fed President Neel Kashkari believes rates should remain at the current, low level until core inflation has reached 2% “on a sustained basis.”
But at the end of the day, the economic recovery continues to depend on the course of the virus, the Fed statement said.
“The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term,” according to the statement.
This is a developing story. It will be updated
— CNN Business’ Matt Egan contributed to this article.
