The Federal Reserve on Wednesday vowed to keep interest rates near zero, as long as inflation is on track to surpass the 2 percent target of the US central bank, a bold new promise to millions of out-of-work Americans Aimed to bring it back to the labor market. But the new guidance marked the beginning of a vigorous monetary policy debate, as the Fed saw a steady, multi-year recovery as the Fed stepped out of the crisis to protect markets during the coronovirus epidemic.
Underlining the depth of disagreement, and the economic uncertainty that underlies it, the decision attracted two dissidents, one from a policy-maker who thought it went too far, and another who thought it wasn’t too far. has gone.
It was also the last policy decision by the US central bank before the country’s November 3 presidential election, which gives the winner a runway of low borrowing costs for years to come. All but one Fed policymaker saw his rates of stay at near-zero levels through 2022. Only four saw him more than this in 2023.
“Effectively what we are saying is that rates will remain highly organized,” Federal Chairman Jerome Powell said at a news conference following the release of policy statements and new economic projections.
The new promise to “increase economic growth by more than 2 percent”, he said, should be a very powerful statement in support of economic activity. “
Recovery is here
The crisis has now resumed since nearly half of American jobs were lost, and about three-quarters of consumer spending has recovered, with the economy coming too far and faster than the Fed thought a few months earlier Was.
New economic projections suggest that policymakers now see a 3.7 percent decline in the economy this year, much less than the 6.5 percent drop in June. They see unemployment, which recorded 8.4 percent in August, coming down to 7.6 percent by the end of the year.
The recovery “is here, and it is well together”, Mr Powell said.
And even when the virus has caused “tremendous human and economic hardship,” he said, “we are learning to live with COVID, which is still widespread,” Mr. Powell said. He said social disturbances and the use of masks allowed the lost land to be recovered in the second quarter of the economy. That contract suffered the most by the United States in the post-World War era.
But with parts of the economy, like the travel and entertainment sectors, likely to take longer to revive, millions will still struggle to find work.
Mr Powell said the recovery was expected to slow, requiring continued support from further government spending, and added, the Fed, which continues to debate further action, including a faster pace of bond purchases.
Or, as the Central Bank’s policy-setting Federal Open Market Committee stated in the dry language of its statement after the end of its two-day meeting, “the committee will be ready to adjust monetary policy stance appropriately if risks are exposed. May hinder the attainment of the goals of the committee. “
The Fed used its policy statement to start by stabilizing financial markets to stimulate the economy, saying it would require its current government to make at least $ 120 billion per month to ensure “accommodative” financials. Will continue bond-buying at the current pace of. Conditions in the future.
The Fed’s pledge to remain accommodated for the foreseeable future initially derailed the shares, but a return to sales in the technology sector left Wall Street largely underutilized by the end of the day. Yields on long-term Treasury securities remained high, meanwhile, while the dollar changed slightly the day against major trading partner currencies.
New economic projections suggest that the Fed does not expect inflation to breach the 2 percent target any time soon.
Mr Powell said the Fed is both “confident and committed and determined”, reducing inflation by 2 percent marginally, but said it would take time.
Promising to keep rates low until inflation rises above the target, for years spent below it, the Fed reflected its new inclination for strong job growth, after nearly two years of review from the previous month. declare.
Both are dissatisfied with the statements of Dallas Fed President Robert Kaplan and Minneapolis Fed Chairman Neil Kashkari, raising specific issue with the central bank’s guidance that it will maintain interest rates where they “until labor market conditions reach maximum levels” Has not arrived – maximum employment “and inflation has risen to 2 percent and exceeded 2 percent for some time. ”
Mr Kaplan said he wanted to prioritize “greater flexibility” because once inflation and maximum employment were on the easier path to reach the Fed’s goals. Mr Kashkari’s dissatisfaction suggests he wanted a higher barrier: for rates where they have stayed up to core inflation – which often runs cooler than overall inflation – has reached “2 percent” on an ongoing basis.