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

© 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.