Business_news Fed signals near-zero rates will last through 2023 to lift economy from coronavirus recession

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  • A majority of Federal Reserve officials see interest rates staying near zero through 2023 as part of a long-term accommodative policy strategy.
  • Neweconomic projectionspublished Wednesday show 16 out of 17 Fed policymakers seeing rates staying at historic lows through 2022. Thirteen officials expect rates to sit near zero through 2023.
  • The central bank voted on Wednesday to hold interest rates at their current lows and continue asset purchases at least at the current pace of $120 billion per month.
  • The Fed set new guidance on when it may raise rates, saying it “expects to maintain an accommodative stance of monetary policy” until maximum employment is achieved and inflation averages 2% over time.
  • Visit the business Insider homepage for more stories.

Federal Reserve policymakers signaled near-zero interest rates will last through 2023 to aid the US economy on its rebound from the coronavirus shutdown.

In updatedeconomic projectionspublished Wednesday, 16 out of 17 Fed officials said they plan to hold rates at historically low levels through 2022. Thirteen officials expect rates to remain near zero through 2023.

The new projections follow the conclusion of the Federal Open market Committee’s two-day September meeting. The central bank elected to hold its benchmark interest rate within the range of 0% to 0.25%, as well as continue its asset purchases at least at the current pace of $80 billion in Treasurys and $40 billion of mortgage-backed securities per month.

The Fed also issued more detailed forward guidance on Wednesday afternoon, pegging future rate hikes to the bank’s long-term inflation goal. The FOMC “expects to maintain an accommodative stance of monetary policy” until maximum employment and an average inflation rate of 2% is achieved, according to astatement.

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The latter of the two outcomes relates to the Fed’s new policy framework, which replaced its longstanding 2% inflation goal with plans to target a 2% average rate over a longer period of time. The policy overhaul signals policymakers will allow for periods of greater-than-2% inflation to balance out recent quarters of slowed price growth.

“Effectively, we’re saying that rates will remain highly accommodative until the economy is far along in its recovery and that should be a very powerful statement in supporting economic stability,” Chairman Jerome Powell said in a Wednesday press conference.

The September FOMC meeting is the last to take place before the November elections, and arrives as legislators struggle to compromise on a second fiscal stimulus package. Powell and other policymakers have repeatedly emphasized that monetary policy isn’t enough to pull the economy out of its coronavirus downturn.

Fed policymakers also forecasted slightly more positive economic trends in its quarterly outlook. The central bank sees gross domestic product shrinking 3.7% this year, up from June’s projection of a 6.5% slide. Officials expect the unemployment rate to fall to 7.6% in the fourth quarter before reaching 5.5% in 2021. 

Inflation is forecasted to reach 1.2% this year, nearly half the central bank’s target.

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“With near-term risks to the outlook still intact, the Fed continues to reiterate that it is too early for victory laps on the economic recovery,” Charlie Ripley, senior investment strategist at Allianz Investment Management, said. “On the horizon, the path of the virus, the upcoming election, and the motivation for additional fiscal stimulus are all hurdles the economy needs to overcome.”

Eight out of 10 FOMC members voted in favor of keeping rates near zero and setting its new forward guidance. Dallas Fed President Robert Kaplan dissented, calling instead for “greater policy rate flexibility.”

Minneapolis Fed President Neel Kashkari also voted against the action and called for the central bank to keep its current rate range “until core inflation has reached 2 percent on a sustained basis.”

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