US Fed likely to keep near zero rates for a few years to boost economy

The US Federal Reserve is likely to provide more guidance at its policy meeting next week to signal intentions to keep interest rates near zero for a few years and help the economy get through the Covid-19 pandemic, according to economists.

"One deliverable that we should be able to count on at the June meeting is the return of the Summary of Economic Projections (SEP)," Jay H. Bryson, acting chief economist at Wells Fargo Securities, said in a report.

"We suspect that may open the door to implicit forward guidance, a tool heralded by policymakers before the current crisis as a primary mechanism for influencing policy," he said.

The Fed usually releases the quarterly SEP four times each year, which lays out Fed officials' expectations about growth, inflation, unemployment and short-term interest rates, reported China's Xinhua news agency.

But the central bank didn't release the SEP in March as the evolving Covid-19 pandemic made it impossible for Fed officials to offer reliable economic forecasts.

The upcoming Fed meeting on June 9-10 likely will include the first update to the SEP since December last year, according to Bryson.

"Rather than provide explicit forward guidance, committee members could implicitly signal that the fed funds rate is unlikely to increase through at least 2022 through changes in the dot plot," Bryson said, referring to Fed officials' individual forecasts of the federal funds rate.

"While the market reaction from such a move would likely be relatively small given that this appears to be the market's base case scenario, it would at least reinforce the idea," he said.

Roberto Perli, a former Fed staffer and now head of global policy research at Cornerstone Macro, also expected the SEP to show that Fed officials would not want to raise rates before 2022.

Ryan Sweet, an economist with Moody's Analytics, believed that the central bank is leaning toward an outcome-based forward guidance, similar but not identical to that used in the last recession.

The Fed cut interest rates to near zero at two unscheduled meetings in March and began purchasing massive quantities of US treasuries and agency mortgage-backed securities to repair financial markets.

It also unveiled new lending programs to provide up to $2.3 trillion to support the economy in response to the pandemic.

The Commerce Department reported last week that economic activity in the first quarter contracted at an annual rate of 5 per cent in a second estimate, 0.2 percentage point lower than the advance estimate.

The fallout from the Covid-19 pandemic will shrink the size of the US economy by $7.9 trillion over the next decade, new projections released by the Congressional Budget Office on Monday revealed.