The Federal Reserve committed Wednesday to do more to help the U.S. economic recovery, promising more asset purchases and lower interest rates for even longer than it previously expected. The outlook is “highly uncertain,” given the pandemic. Jerome Powell left the world the strong impression that interest rates will stay near zero until 2023.
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.”
It was the central bank’s first meeting since it adopted a new strategy in August that will keep the benchmark federal funds rate near zero, even after inflation has surpassed its 2% target.
According to the new rule, “following periods when inflation has been running persistently below 2%, appropriate monetary policy will likely aim to achieve inflation moderately above 2% for some time.”
“These changes clarify our strong commitment over a longer time horizon,” Chair Jerome Powell said during a post-meeting press conference.
The purpose is to help the nation achieve full employment; in the past, the central bank would hike interest rates when unemployment fell because it assumed inflation, once one of the biggest threats to the economy, was rising.
There were two dissents to the Fed forward guidance. Dallas Fed President Rob Kaplan seemed to favor the prior guidance and wanted the Fed to retain greater flexibility once the economy was on track to meet its two goals. Minneapolis Fed President Neel Kashkari proposed a much more streamlined guidance that the Fed would maintain rates close to zero until core inflation has reached 2% on a sustained basis.
The Fed has already taken a range of extraordinary actions to support the economy, including slashing interest rates to near-zero in March, purchasing an unlimited amount of Treasurys (a practice known as quantitative easing) and launching nine lending facilities to ensure that credit flows to businesses and Wall Street banks.