Federal Reserve officials on Wednesday signaled that they are in no hurry to recall support for a pandemic-damaged economy and released new forecasts showing the central bank’s key interest rate will be held near zero for years to come – even if it does. The outlook is improving rapidly.
After a painful 2020 in which the Fed pledged to do everything possible to prevent permanent virus-induced economic damage, the decision underscored that the political response has entered a new phase: while it lasts.
Fed officials, who cut their key interest rate to near zero last March, maintained that setting on Wednesday, as was widely expected. If you hold the bottom, it will lower the cost of borrowing, fuel demand, and fuel growth across the economy.
But their new predictions sent a remarkably patient message about the road ahead. Most policymakers expected interest rates to stay close to zero through 2023, despite targeting faster growth, rapidly falling unemployment, and inflation rising above 2 percent.
By continuing to promise aid in the face of the brightening prospects, the central bank underscored its top priorities, which are to bring the labor market back to full health and to sustainably raise prices, which have been sluggish for years. And it became clear that it’s more about holding up to the recent boom than warnings that inflation could get out of hand.
“We are determined to give the economy the support it needs to return as quickly as possible to a state of maximum employment and price stability,” said Jerome H. Powell, chairman of the Fed, during a news conference Wednesday. This help will continue “as long as possible”.
Fed officials in their post-meeting statement noted that some parts of the economy were improving, and Powell said Covid-19 vaccines and fiscal incentives had been driving his colleagues’ sunnier economic expectations. But he also pointed out that the unemployment rate remained high and that 9.5 million jobs that had disappeared during the pandemic were still missing in the economy.
“It’s just a lot of people going back to work, and it’s not going to happen overnight – it’s going to take time,” Powell said. “The faster the better. We’d like to see it sooner rather than later.”
Fed officials now expect unemployment to fall to 4.5 percent this year as growth rises, a faster decline than previously thought, and inflation to fall to 2.4 percent by 2021 before it subsides. You can see that it is 2.1 percent by the end of 2023.
Their willingness to allow higher inflation without reacting to it confirms the central bank’s new monetary policy approach. The Fed said last year that it would stop preemptively hike rates to curb upcoming inflation and aim for 2 percent as the average target – meaning it welcomes periods of slightly faster price gains.
“You look at their economic forecasts, they are all better,” said Priya Misra, director of global interest rate strategy at TD Securities. “They’re telling the market they’re going to let inflation rise above 2 percent.”
The publication of economic forecasts on Wednesday was closely watched on Wall Street, partly because the central bank had to digest a lot of new information and incorporate it into its political guidelines.
Since the Fed last updated its economic forecast three months ago, Congress and the White House have passed two major spending packages – a $ 900 billion bill in December and a $ 1.9 trillion measure in this month. This huge infusion of government money will put money in consumers’ bank accounts and could help avert economic damage that Fed officials were concerned about, such as bankruptcies and evictions.
The Treasury Department announced Wednesday that 90 million direct checks have been paid to individuals totaling more than $ 242 billion.
Americans are also getting vaccinations at a steady pace, which raises hopes that the pandemic will subside to the point that hard-hit service-industry companies can reopen fully at some point this year.
To add to these positive developments, coronavirus cases have eased and the unemployment rate suggests the economy continues to heal slowly. Unemployment fell to 6.2 percent in February, according to the latest data from the Labor Department, from a high of 14.8 percent in April.
But there is still a long way to go – a broader level of unemployment that Fed officials often cite is 9.5 percent – and Mr Powell has repeatedly pointed out that uncertainty remains high.
“The path of the virus remains very important,” he said, noting that new and virulent strains have emerged. “We’re not done yet and I would hate it if we lost sight of the ball before we actually finish the job.”
Congress has tasked the Fed with bringing the economy back to full employment and stable prices. Mr. Powell and his colleagues realized they wanted to see both a healthy labor market and inflation that rose slightly above 2 percent and is expected to stay there for some time before interest rates hike.
The March economic forecast showed that officials broadly expect the economy to take years to overcome these hurdles. Only seven officials have announced rate hikes by the end of 2023, while eleven have put rate hikes on hold.
The Fed also buys $ 120 billion in bonds every month. The criteria for slowing these purchases have been less clear as “substantial” further progress is needed.
Mr Powell stated on Wednesday that the Fed was not even ready to talk about when to reduce this support. If so, he said, it will signal “well before any decision to actually rejuvenate”.
The markets have been on the verge in the past few weeks. The improving economic outlook and the prospect of slightly higher inflation have pushed interest rates higher on longer-term Treasury bills. This has at times resulted in stocks swooning – stock prices tend to fall as interest rates rise – although key indices remain near record highs.
Part of that discomfort is directly related to Mr. Powell’s central bank. Investors have expected the Fed to be less patient than previously thought as the backdrop improves, bringing forward estimates of when the Fed might hike rates.
In fact, some prominent economists and commentators have warned that the heavy government spending that dwarfed the 2008 crisis response could drive prices much higher by pumping so many dollars into an already healing economy. That could force the Fed to hike rates sharply to control them.
However, the Fed has consistently downplayed these concerns, pointing out that the problem in modern times has been weak prices, which could pose the risk of prices falling completely and which hamper the Fed’s ability to cut inflation rates during troubled times. When prices go up, officials often say they have the means to deal with them.
“They want a speedy recovery, even more than usual,” said Diane Swonk, chief economist at Grant Thornton. “The Fed doesn’t want to get in each other’s way because of a temporary surge in inflation.”