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Fed Holds Rates Steady, Signals Low Rates Here to Stay Through 2023

Economic Indicators Dec 16, 2020 02:33PM ET
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© Reuters.

By Yasin Ebrahim

Investing.com – The Federal Reserve kept rates unchanged Wednesday, and signaled that near-zero rates would continue through 2023 to support the next phase of the economic recovery as the vaccine rollout gets underway.

The Federal Open Market Committee left its benchmark rate unchanged in the range of 0% to 0.25%. 

The low-rate environment will continue for some time, with policymakers backing rates to remain unchanged through 2023.

The Fed's interest-rate outlook for 2020 through 2023 was 0.1%, unchanged from previous projections in September, the Fed's Summary of Economic Projections showed.

The central bank pledged to maintain its near-zero interest rate range for some time comes as the recovery has slowed recently amid rising infections that have triggered restrictions and exacerbated concerns over the uncertain economic outlook.

Despite the recent slowdown, the Fed has upped its outlook on growth, though reiterated the ongoing pandemic poses "considerable risks to the economic outlook over the medium term."  

The economy is expected to contract by 2.4% in 2020, up from an estimate for 3.7% contraction previously. For 2021, the Fed expects the economy to grow by 4.2%, and 3.2% in 2022, up from previous estimates of 4% and 3% respectively.

Fed Chairman Jerome Powell said the first-quarter data will show a significant impact from a surge in the virus, but the economy should perform strongly in the second half of next year, underpinned by a boost from the vaccine rollout. 

The unemployment rate for the year is expected to come in at 6.7%, down from 7.6% previously, and fall further to 5% next year, down from a previous estimate of 5.5%. The unemployment rate was estimated to improve further, and eventually drop to 3.7% in 2023, down from a prior estimate of 4%. 

The pace of inflation, which the fed has earmarked as a key driver of future monetary policy decisions, is forecast to cool to a rate of 1.4% this year, but improve to 1.8% next year, compared with prior estimates of 1.5% and 1.7% respectively. Looking ahead to 2023, inflation is projected to reach 2%, though the Fed has reiterated that it would let inflation run above target for some time.

"[T]he Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent," the Fed said.

With rates near the zero bound level, the central bank has relied on its bond-buying purchases to steady the economic fallout, buying  $120 billion bonds on a monthly basis. The bond-buying program has seen the Fed's balance sheet rise above  $7 trillion from about $4 trillion just before the pandemic struck in early March, but the Fed appears in no hurry to curb the pace of purchases.

The current pace of bond buying would continue "until substantial further progress has been made toward the Committee's maximum employment and price stability goals," the Fed said. "These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses."

Ahead of the FOMC meeting, some had floated the idea of the Fed adopting a Bank of Canada approach - by trimming bond purchases to target longer duration bonds - but Powell said the view among Fed members on the BoC approach was "mixed"  and wasn't high on the list of possibilities.

Fed Holds Rates Steady, Signals Low Rates Here to Stay Through 2023
 

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Comments (15)
Dec 16, 2020 10:28PM ET
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Congress won't push back the Weimar replay.
Jesse Mulliniks
Jesse Mulliniks Dec 16, 2020 6:42PM ET
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Say hello to hyperinflation folks
perplexed76 .
perplexed76 . Dec 16, 2020 6:42PM ET
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much worse:deflation. No money for people, all money in virtual markets.
New Jazenevd
New Jazenevd Dec 16, 2020 5:43PM ET
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Low rates or no rates? It looks the latter.
The GOAT
The_Goat Dec 16, 2020 5:25PM ET
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There never raising rates since the government has toooooo much debt. All bluff from the fed
Frederick Chotsky
Chotsky Dec 16, 2020 5:25PM ET
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Especially with Yellin coming back in. She'll make sure money keeps getting printed and interest rates are at zero.
New Jazenevd
New Jazenevd Dec 16, 2020 5:25PM ET
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Frederick Chotsky  They will raise once Reps win press elections in future.
la popeye
la popeye Dec 16, 2020 4:15PM ET
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mushroom ?
la popeye
la popeye Dec 16, 2020 4:14PM ET
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crystal ball till 2023 ? 🥴
Zoltan Farago
Zoltan Farago Dec 16, 2020 4:10PM ET
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stock markets are ridk free investments till 2023.
Vin Leo
Vinleo Dec 16, 2020 3:09PM ET
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Good for gold, silver, and crytpo
Greg Nathan
Greg Nathan Dec 16, 2020 3:09PM ET
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Absolutely!  Got gold?
Laurie Ross
Laurie Ross Dec 16, 2020 3:04PM ET
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QE Forever
Mitchel Pioneer
Mitchel Pioneer Dec 16, 2020 2:49PM ET
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Ah yes, and entire days losses magically vanish in minutes, as the 2PM breaker fires, and round of criminal manipulation ensues.  The US Stock Market is the laughingstock of the financial world, and greatest investment fraud in history.
Jose Mibaresh
Jose Mibaresh Dec 16, 2020 2:49PM ET
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Just the US market?
 
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