US Federal Reserve officials on Wednesday held interest rates near zero and signaled that they would stay there for at least three years, vowing to delay tightening until the US gets back to maximum employment and 2 percent inflation.
The US central bank “expects to maintain an accommodative stance” until those outcomes are achieved, it said in a statement following a two-day meeting that beefed up its description of future policy.
The fresh guidance is the Fed’s first step in an evolving communication strategy after it unveiled a new long-term policy framework last month to allow inflation to overshoot its 2 percent target after periods of under-performance.
Announced by Fed Chair Jerome Powell at its conference in Jackson Hole, Wyoming, officials expect to refine their approach to economic projections later this year and they might also reach a consensus on how to talk about their balance sheet.
“This very strong, very powerful guidance shows both our confidence and our determination,” Powell told a news conference following the meeting, although he added that it was still a bit of a work in progress.
“There’s no cook book,” he said.
The US Treasuries yield curve steepened slightly after the decision and as investors digested Powell’s remarks.
Ten and 30-year yields briefly spiked to session highs of 0.70 percent and 1.46 percent respectively while he spoke.
That caused the spread between two and 10-year yields, along with the gap between five and 30-year yields, to widen slightly.
The US dollar rallied and Asian stocks dropped along with US and European futures as markets digested Powell’s uncertainty about the economic rebound and a lack of fresh measures to contain longer-term bond yields.
“Powell’s most important point is that the Fed will keep policy accommodative for as long as it takes to bring the hardest-hit workers back,” said Diane Swonk, chief economist at Grant Thornton in Chicago. “Powell was more somber and sobering in his tenor than the statement.”
The vote, in the Federal Open Market Committee’s final scheduled meeting before the US presidential election on Nov. 3, was 8-2.
Dallas Fed President Robert Kaplan dissented, preferring to retain “greater policy rate flexibility,” while Minneapolis Fed President Neel Kashkari dissented in favor of waiting for a rate hike until “core inflation has reached 2 percent on a sustained basis.”
Powell and other Fed officials have stressed in recent weeks that the US recovery is highly dependent on the nation’s ability to improve its COVID-19 response, and that further fiscal stimulus is likely needed to support jobs and incomes.
The Fed on Wednesday committed to using its full range of tools to support the economic recovery.
The central bank repeated that it would continue buying Treasuries and mortgage-backed securities “at least at the current pace to sustain smooth market functioning.”
A separate statement pegged those amounts at US$80 billion of Treasuries a month and US$40 billion of mortgage-backed securities.
Officials expect rates to stay ultra-low through 2023, according to the median projection of their quarterly forecasts, although four officials penciled in at least one hike in 2023.
In other updates to quarterly forecasts, Fed officials expect a shallower economic contraction this year than before, but a slower recovery in the coming years.
“The recovery has progressed more quickly than generally expected,” Powell said, while cautioning that the pace of activity would likely slow and “the path ahead remains highly uncertain.”
In addition to slashing borrowing costs in March, the central bank has pumped trillions of US dollars into the financial system through bond purchases and launched a slew of emergency lending facilities to keep businesses afloat.
The US economy has partly recovered from the steepest downturn on record and some sectors such as housing are doing well, but unemployment remains high, and industries like hospitality and travel are depressed.
Moreover, temporary extra jobless benefits are running out and the political stalemate over a new round of stimulus threatens to set back the economy.
Uncertainty could hang over government policies at least until the outcome of the presidential and congressional elections is clear.
Powell said that fiscal measures taken early in the crisis helped and more was probably needed.
“The overwhelming majority of private forecasters who project an ongoing recovery are assuming there will be additional substantial fiscal support,” he said, adding that about 11 million Americans remain out of work and would require further assistance.
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