You are here: Home » International » News » Economy
Business Standard

Federal Reserve vows to keep interest rates near zero until inflation rises

The Fed's decision drew two dissents, one from a policymaker who thought it went too far, and the other from one who thought it didn't go far enough

US Federal Reserve | US economy | Jerome Powell


US federal reserve
The new guidance marks a monetary policy shift, first announced by the Fed last month

The Federal Reserve kept interest rates pinned near zero on Wednesday and made a bold, new promise: to keep them there until is on track to "moderately exceed" the US central bank's 2 per cent target "for some time."

The new guidance marks a monetary policy shift, first announced by the Fed last month, that is aimed to offset years of weak and allow the to keep adding jobs for as long as possible.

"Effectively what we are saying is that rates will remain highly accommodative until the is far along in its recovery," Fed Chair said in a news conference following the release of the central bank's latest policy statement and economic projections.

"That should be a very powerful statement in supporting economic activity" and returning inflation to the Fed's 2 per cent inflation goal faster, he said, adding that he thinks the forward guidance will be "durable"

The recovery, Powell noted, is ongoing but the pace is expected to slow, requiring continued support from the Fed and, he said, from further government spending.

The Fed's decision drew two dissents, one from a policymaker who thought it went too far, and the other from one who thought it didn't go far enough.

The Fed also used its policy statement to begin to pivot from stabilizing financial markets to stimulating the economy, saying that it would keep its current government bond-buying at least at the current pace of $120 billion per month, in part to ensure "accommodative" financial conditions in the future.

US stocks added to earlier gains after the release of the statement before trending lower as Powell spoke, with the S&P 500 index last down 0.1 per cent and the Nasdaq falling 0.8 per cent. Long-end yields rose, with the 30-year US Treasury yield last at 1.44 per cent and the benchmark 10-year yield at 0.68 per cent.

The dollar edged up against a basket of major trading partner currencies.

'Tremendous' Hardship

The epidemic continued to weigh on the economy, the Fed said in its statement, released after the end of its latest two-day policy meeting, even as officials upgraded their immediate outlook for the

The virus "is causing tremendous human and economic hardship," the rate-setting Federal Open Market Committee said, adding that the Fed is "committed to using its full range of tools to support the in this challenging time." New economic projections released with the policy statement showed interest rates on hold through at least 2023, with inflation never breaching 2 per cent over that period.

Powell said the Fed "is both confident and committed and determined" to modestly overshooting 2 per cent inflation, but added that it would take time.Policymakers saw the economy shrinking 3.7 per cent this year, far less than the 6.5 per cent decline forecast in June, and unemployment, which registered 8.4 per cent in August, was seen falling to 7.6 per cent by the end of the year.

All Fed policymakers saw interest rates staying where they are through 2022, with four eying the need for a hike in 2023.

But in pledging to keep rates low until inflation was moving above the 2 per cent target, to make up for years spent below it, the Fed reflected its new tilt towards stronger job growth, announced late last month after a nearly two-year review.

Both dissenters to the statement, Dallas Fed President Robert Kaplan and Minneapolis Fed President Neel Kashkari, took specific issue with the central bank's guidance that it would keep interest rates where they are "until labor market conditions have reached levels consistent with ... maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time." Kaplan said he would have preferred to have "greater flexibility" once inflation and maximum employment were on track to reaching the Fed's goals, an easier hurdle to reach.

Kashkari's dissent suggests he wanted a higher hurdle: for rates to stay where they are until core inflation - which often runs cooler than overall inflation - has reached 2 per cent "on a sustained basis."

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

First Published: Thu, September 17 2020. 02:24 IST