Fed Pledges Low Interest Rates for Years, and Until Inflation Picks Up

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WASHINGTON — Federal Reserve officials expect to leave interest rates near zero for years — through at least 2023 — as they try to coax the economy back to full strength after the pandemic-induced recession, based on their September policy statement and economic projections released Wednesday.

The announcement also reinforced the central bank’s August pledge to tolerate slightly higher price gains to offset periods of weak inflation, underscoring that Chair Jerome H. Powell and his colleagues plan to be extraordinarily patient as they try to cushion the economy in the months and years ahead.

The policy setting Federal Open Market Committee “expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time,” officials said in their statement.

“Effectively we’re saying rates will remain highly accommodative until the economy is far along in its recovery,” Mr. Powell said at a news conference following the meeting.

Mr. Powell noted that while the economy has picked up, the recovery in household spending probably reflected “substantial and timely” fiscal support, and said services that involve people gathering together — like entertainment and tourism — remain depressed.

“Overall activity remains well below its level before the pandemic, and the path ahead remains highly uncertain,” Mr. Powell said.

The Fed slashed interest rates to near zero almost exactly six months ago, as the pandemic first swept the United States and markets tiptoed on the brink of disaster. Such low interest rates help to spur economic growth by encouraging home refinancing, business investment and other types of borrowing. While investors and economists expect borrowing costs to remain at rock-bottom for years, the Fed’s declaration that they will wait for inflation to actually heat up before adjusting policy should buttress that outlook.

Mr. Powell tried to hammer that point home, calling the new language in the Fed’s official statement “very powerful guidance.”

“These changes clarify our strong commitment over a longer time horizon,” he said.

Cutting the funds rate is not the only tool in the Fed’s arsenal — the central bank is also buying huge quantities of mortgage-backed and Treasury securities. The primary goal of those purchases has been to stabilize markets, but bond-buying can help to stimulate the economy by pushing down longer-term interest rates. It can also prod investors to move into riskier assets with higher payoffs, driving them toward corporate bonds and stocks.

Fed officials are mulling when and how to update their asset purchase program, and said Wednesday that they would maintain purchases at “at least” their current pace to “sustain smooth market functioning and help foster accommodative financial conditions.”

The Fed updated its Summary of Economic Projections, a set of estimates for how the economy and interest rates will develop in coming years. Officials saw unemployment ending 2020 at a lower rate: The median official expects the rate to average 7.6 percent over the final three months of the year, compared with 9.3 percent when the Fed released its last set of projections in June.

That change came after the jobless rate declined from 14.7 percent in April to 8.4 percent in August, a faster drop than most economists had expected. The median Fed official does not expect interest rates to climb higher through the end of the 2023, the projections showed, and sees inflation returning to 2 percent only that year.

Still, the Fed’s tools are limited and Mr. Powell once again noted that more fiscal support — the kind of direct spending that only Congress can authorize — will be needed to help the economy continue its recovery. Mr. Powell said much of the economic improvement was a result of that spending, saying “the fiscal policy actions that have been taken thus far have made a critical difference,” Mr. Powell said.

“My sense is that more fiscal support is likely to be needed.”

The Fed has taken a series of sweeping steps to try and prop up the economy, including establishing lending programs aimed at keeping credit flowing to households and businesses. But it is facing a significant challenge as it tries to restore the labor market to pre-pandemic levels. Millions of people remain out of work and it is unclear how quickly — or even if — all of those workers will find re-employment.

“The labor market has been recovering, but it’s a long way, a long way, from maximum employment,” Mr. Powell said, adding that the recovery will move most quickly through areas that were not directly affected by the virus. Parts of the economy facing a direct hit — like airlines, sports stadiums and restaurants — “are going to be challenging for some time.”

“It’s millions of people,” he said, adding that it is the Fed’s job “not to forget those people.”

As part of that effort, Mr. Powell in August announced that the Fed was shifting its policy strategy, and no longer planned to lift interest rates simply because the unemployment rate had dropped below levels it saw as sustainable. Officials also said they would adopt an average inflation target, aiming for 2 percent over time rather than as an absolute goal — implying that the Fed would sometimes allow price increases to run slightly higher.

The September statement backed up that move.

“The 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 Wednesday. Previously, it had pledged to aim for 2 percent inflation on a “symmetric” basis, meaning one that is equally unsatisfied if inflation runs above or below the target.

“If we do lift off, we will keep policy accommodative until we have a moderate overshoot of inflation for some time,” Mr. Powell said.

Two officials, Robert S. Kaplan from the Federal Reserve Bank of Dallas and Neel Kashkari from the Minneapolis Fed, voted against Wednesday’s decision. Mr. Kaplan favored retaining greater flexibility about future rate setting — suggesting that he did not want to tie interest rates so closely to real-life inflation outcomes, giving the Fed more flexibility to raise rates earlier.

Mr. Kashkari took the opposite tack. He wanted the committee “to indicate that it expects to maintain the current target range until core inflation has reached 2 percent on a sustained basis,” the statement said, which would argue for a longer period of very-low rates.

The Fed is trying to stabilize inflation, which has slipped lower over recent decades along with sustainable growth and interest rates.

Nudging price gains slightly higher would buy Fed officials more room to stimulate the economy in bad times, since rates incorporate inflation. A little inflation is also thought to grease the wheels of the economy, giving employers room to pass along price increases and raise wages.

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