Fed Vows To Keep Keep Rates Near Zero Until 2023

By Glenn Dyer | More Articles by Glenn Dyer

The US Federal Reserve expects to leave interest rates unchanged at record lows until the end of 2023 at the earliest, and beyond if necessary.

In the post-meeting statement issued early Thursday morning, Sydney time, the Fed set out new economic conditions that must be met before it will raise rates

The Fed said it decided to keep its policy interest rate at near-zero and expects this will be appropriate until two things happen: labor market conditions return to the “maximum employment” and inflation has risen to 2% and “is on track to moderately exceed 2% for some time.”

But overriding all of this is the fight to control COVID-19 with the Fed again making clear the path of the economy will depend on the course of the coronavirus pandemic.

It is the first time the Fed has been so explicit in its forward guidance on rates and inflation, a move that surprised some analysts who had been expecting the central bank to issue such a statement in December.

“Effectively, we’re saying rates will remain highly accommodative until the economy is far along in its recovery,” Fed chair, Jay Powell said at a news conference following the meeting.

The comments saw small gains on Wall Street which quickly vanished. The Dow rose to be up 266 points in the wake of the statement, but then came back to close the session up just 36 points.

The S&P 500 closed down 0.46% or 15 points, but the Nasdaq continued its shaky trading, losing 1.25% or more than 139 points.

Gold eased a fraction and oil regained the $US40 a barrel level for both West Texas and Brent type crudes.

That will see the ASX overnight futures market end down around 15 points, meaning a quiet start to trading today after yesterday’s sold 1% or 61 point gain.

Markets which had been looking for a statement like this since Mr. Powell revealed the new approach to inflation targeting and employment at the Jackson Hole virtual seminar in late August.

The new guidance from the bank’s key Federal Open Market Committee, and is likely to translate into ultra-low interest rates for years to come.

Separately, the Fed released its economic forecasts to 2023. The central bank’s so-called “dot plot” of likely interest rates projects no hike through the end of 2023, with only 4 of 17 of the policymaking officials penciling in a rate hike.

Officials saw unemployment ending 2020 at a lower rate than it previously forecast: The median official expects the rate to average 7.6 percent over the final three months of the year, compared with 9.3 percent when the Fed released its last set of projections in June.

Mr. Powell noted that the economy had picked up, but the recovery in household spending probably reflected “substantial and timely” fiscal support, and said services that involved people gathering together — like entertainment and tourism — remained depressed.

“Overall activity remains well below its level before the pandemic, and the path ahead remains highly uncertain,” He said.=

The Fed also said it will continue to purchase at least $US120 billion per month of Treasuries and agency mortgage-backed securities to help smooth markets and help “foster accommodative financial conditions.”

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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