U.S. Fed projects near-zero rate to continue through 2023

Sep 17, 2020 – 07:06 KYODO NEWS

File photo of U.S. Federal Reserve Chairman Jerome Powell (Kyodo)

WASHINGTON – The U.S. Federal Reserve indicated Wednesday that interest rates will be kept near zero at least through 2023 to support the fragile economic recovery as the coronavirus pandemic lingers, while committing to a recently unveiled strategy seeking to push inflation above its long-term goal of 2 percent.

After a two-day meeting of the policy-setting Federal Open Market Committee, the central bank decided it will keep its target range for the federal funds rate at 0 to 0.25 percent and maintain its large-scale asset purchases. The measures were introduced in March as the coronavirus pandemic intensified in the country.

The meeting followed an announcement in late August on the central bank’s new policy framework that allows monetary easing to continue even if inflation runs above its long-term 2 percent objective in a bid to achieve maximum employment.

Reflecting the position, the central bank said in a statement issued after the meeting that it aims to “achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent.”

The Fed also said it expects to “maintain an accommodative stance of monetary policy until these outcomes are achieved,” while noting that it “would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede” the attainment of the goals.

In 2012, the Fed announced its long-term inflation target of 2 percent, as measured by annual change in the price index for personal consumption expenditures. But over the past years, the central bank has generally undershot the target aimed at long-term price stability.

The new framework was unveiled with the reasoning that a strong labor market may be sustained without triggering an unwelcome rise in inflation, as signaled during the economic expansion of record length seen before the pandemic.

As the country continues to recover from the economic fallout of the pandemic, the Fed said in its latest economic projections that the U.S. economy will shrink 3.7 percent in the fourth quarter of 2020 from the same period a year before, revised up from a 6.5 percent contraction estimated in June.

It also expected the economy, measured by real gross domestic product, to recover to 4.0 percent growth in the October-December quarter of 2021.

The unemployment rate will be 7.6 percent by the end of this year and gradually decline to 5.5 percent in 2021 and 4.6 percent in 2022, according to the projections.

All 17 Fed policymakers projected that the interest rate level will remain the same through 2021, with only one of them expecting rate hikes in 2022 and four in 2023.

Fed Chairman Jerome Powell said at a press conference after the meeting that the recovery of the economy has “progressed more quickly than generally expected.”

But he added that the “overall activity remains well below its level before the pandemic” and the “path ahead remains highly uncertain.”

As the United States has been gradually reopening from the pandemic-triggered shutdown earlier this year, the unemployment rate fell to 8.4 percent in August after hitting 14.7 percent in April.

But the pace of job growth has slowed, with the August job gains of 1.4 million marking the weakest figure since the recovery started.