Fed Signals Interest Rates to Stay Near Zero Through 2023 -- 5th Update

09/16/2020 | 03:39pm

By Nick Timiraos

WASHINGTON -- Federal Reserve officials projected no plans to raise interest rates through 2023 and delivered more detail about why they think the economy will need support for so long amid 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.

"These changes clarify our strong commitment over a longer time horizon, " said Fed Chairman Jerome Powell at a news conference.

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 point to some improvements in many officials' economic outlook. But the officials nevertheless 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.

Mr. Powell said it would be important for Congress to spend more money to support these households and prevent additional damage to the economy.

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.

Wednesday's communications from the Fed, following on the completion of the new framework, showed just how much the central bank expects to change the way it will react to improvements in the economy. The projections showed most officials expected interest rates to stay near zero over the next three years, even if inflation reaches 2% and the unemployment falls to around 4%.

By contrast, when the Fed lifted interest rates at the end of 2015 after holding them near zero for seven years, officials projected unemployment would end the year around 5% and so-called core inflation, which excludes volatile food and energy prices, would end the year at 1.3% and wouldn't reach 2% for three more years.

Officials made one other change to its statement to clarify that their purchases of Treasury and mortgage-backed securities -- initiated in March with the stated goal of repairing market functioning -- are being maintained now to also support a faster economic recovery.

Since mid-June, the Fed has been purchasing $80 billion a month in Treasurys and $40 billion a month in mortgage-backed debt, net of redemptions, down from even larger quantities in the spring. They have bought around $1 trillion in mortgage-backed securities since March and nearly $2 trillion in Treasurys.

Reframing the reasons for these purchases is likely to raise questions about when or how the Fed might make more meaningful changes to the bond-purchase program later.

These questions include whether to link guidance about rate plans to the pace of asset purchases and whether to shift purchases of Treasurys to longer-dated securities, as the Fed did during its bond-buying program from 2012 to 2014. Currently, the Fed is purchasing a wider range of short-, intermediate- and long-term securities.

"We have so much [Treasury] supply coming down the pike that the market wants something a little bit more specific," said Priya Misra, head of interest-rate strategy at TD Securities.

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


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