Until the economy reaches full employment and inflation runs “moderately” above its 2% goal for “some time,” the Fed is likely to keep its key interest rate near zero.
WASHINGTON – The Federal Reserve said Wednesday that it will likely keep its key interest rate near zero until the economy reaches full employment and inflation runs “moderately” above its 2% goal for “some time,” a vow that economists say is likely to keep rates at rock bottom for the next four to five years.
The central bank made the market-friendly commitment sooner than many top economists anticipated and it drove the Dow more than 150 points higher before the market gave back the gains on persistent tech stock jitters.
The Fed’s assertion is consistent with its new policy framework unveiled last month, which states that officials will no longer preemptively raise rates as unemployment falls to head off a potential spike in inflation.
Rather, the Fed will allow inflation to edge above 2% for a time to make up for years of persistently low inflation and to bolster job gains.
The Fed plans to keep its benchmark short-term rate 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 said in a statement after a two-day meeting.
That, the central bank said, will help ensure inflation averages 2% “over time” and the public can reliably expect 2% price increase and longer-term inflation expectations remain well anchored at 2%.
“These are powerful commitments that we think will support the full recovery as long s it takes,” Federal Reserve Chairman Jerome Powell said at a news conference.
Previously, the Fed said it would maintain near-zero rates “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”
The U.S. economy has partially recovered from the coronavirus recession more rapidly than expected, but the Federal Reserve envisions a slog the rest of the way.
“The labor market is recovering but it’s a long way – a long way – from maximum employment,” Powell said.
Besides keeping its benchmark rate near zero, new Fed forecasts indicate it likely will stay there at least through 2023, based on policymakers’ median estimate.
That’s a year longer than its previous estimate since the Fed’s forecast horizon was extended.
But the promise to keep rates near zero until inflation picks up should maintain rock-bottom rates until mid-2024 or possibly longer, says economist Kathy Bostjancic of Oxford Economics.
The Fed now predicts the economy will contract by 3.7% this year, below its 6.5% estimate in June, and the 8.4% unemployment rate will fall to 7.6% by year-end.
The Fed previously reckoned the jobless rate would end 2020 at 9.3%.
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