Fed Signals Interest Rates to Stay Near Zero Through 2023 -- 2nd Update

09/16/2020 | 02:31pm

By Nick Timiraos

WASHINGTON -- Federal Reserve officials projected no plans to raise interest rates through 2023 and said they were committed to providing more support to an economy that faces an uneven recovery from the coronavirus pandemic.

In new projections released Wednesday, all 17 officials said they expect to keep rates near zero at least through next year, and 13 projected rates would stay there through 2023.

The Fed revised its postmeeting statement to deliver more specifics about the conditions that would warrant keeping interest rates near zero. Two officials dissented from the new statement.

The Fed said it would maintain rates near zero "until labor market conditions have reached levels consistent with the committee's assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time."

The Fed's two-day policy meeting that concluded Wednesday is the first since officials last month announced a new framework that abandoned the central bank's longtime strategy of pre-emptively lifting interest rates to head off higher inflation.

Officials also revised their forecasts to reflect a faster-than-anticipated decline in the unemployment rate this summer. They now project unemployment will average around 7% to 8% during the last three months of this year, down from June projections of around 9% to 10%. The unemployment rate fell from a high of 14.7% in April to 8.4% last month, though some of the decline reflects fewer Americans looking for work right now.

The projections don't point to any meaningful improvements in most officials' economic outlook. They have indicated concern that easy gains from reopening the economy could mask deeper scars, as the most vulnerable businesses shut down and employees in hard-hit sectors face longer spells of joblessness.

While the ranks of temporarily laid-off workers have fallen by two-thirds, or around 12 million, since the spring, more than two million Americans have permanently lost their jobs. These numbers could increase as the most at-risk businesses shut down or delay plans to reopen.

The latest Fed projections show that even by the end of 2023, most officials believe inflation will only have begun returning to 2% and that unemployment will begin nearing levels that prevailed before the crisis struck in March.

A big question heading into this week's meeting was whether the Fed would detail the specific conditions that might prompt an end to near-zero interest rates. Such so-called forward guidance is one way officials believe they can provide more stimulus.

Several officials have said they were in no rush to do this because they wanted to first have more clarity about the economic outlook and because investors already expect the Fed to keep rates low for several years. Dallas Fed President Robert Kaplan dissented Wednesday because he didn't want to make the guidance more specific right now.

But other officials have said this guidance needed to build on their new policy framework by spelling out specific inflation and labor-market conditions consistent with keeping rates near zero. These steps could help convince markets that the Fed won't raise rates aggressively even after the virus has been controlled and the economy is on sturdier footing.

Under the new framework, the Fed says that following periods when inflation has run persistently below its 2% target, officials will want inflation to run moderately above 2% for some time.

With inflation running persistently below the Fed's 2% goal in recent years, the Fed said Wednesday it would "aim to achieve inflation moderately above 2% for some time so that inflation averages 2% over time" and so that longer-run expectations of future inflation remain anchored at that level, the statement said.

Minneapolis Fed President Neel Kashkari dissented Wednesday in favor of a simpler formulation of this guidance.

Write to Nick Timiraos at nick.timiraos@wsj.com


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