Fed will keep interest rates low until economy recovers
The Federal Reserve left its overnight lending rate unchanged on Wednesday, and said it expects to keep interest rates low until labor market conditions and inflation hit the Federal Open Market Committee‘s standards of maximum employment and inflation moderately exceeding 2% for some time.
“Our guidance is outcome-based and is tied to progress toward reaching our employment and inflation goals. Thus, if progress toward our goals were to slow, the guidance would convey our intention to increase policy accommodation through a lower expected path of the federal funds rate, and a higher expected path of the balance sheet,” Fed Chairman Jerome Powell said in press conference on Wednesday.
According to the FOMC, the path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment and inflation in the near term and poses considerable risks to the economic outlook over the medium term, the committee said.
The committee reiterated its commitment to purchase mortgage-backed securities and Treasuries to support the flow of credit – increasing its holdings of Treasury securities by at least $80 billion per month and agency MBS by at least $40 billion per month.
Overall, Fed purchases have helped to drive mortgage rates and other loan interest rates to the lowest level on record by boosting competition for bonds, which compresses yields.
“In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals,” the statement said.
Following the release of the Fed’s intention to keep short-term rates at zero for the foreseeable future, Mortgage Bankers Association chief economist Mike Fratantoni said the MBA fully expects the Fed to maintain low interest rates at the zero level bound for years to come.
“While the Fed has been clear regarding their plans for the federal funds target, they had been less so with respect to asset purchases. Today’s announcement provided a further commitment that they would continue to purchase Treasuries and MBS at the current pace until there’s ‘substantial progress’ towards a stronger economy. With the vaccine distribution commencing, we are hopeful to see such progress over the course of 2021,” Fratantoni said.
Fratantoni also said the Fed has now provided assurance that supportive policies will remain in place, and there is hope that an additional fiscal stimulus package will soon be passed .
The FOMC also released projections from FOMC members, which on average estimated unemployment to fall by nearly half by 2023. They also predict that real GDP will rise to a peak in 2021 before leveling off and perhaps heading downward through 2023.
In Wednesday’s press conference, Powell said that it’s going to take a while to get inflation back to 2% in the latest crisis.
“We’re honest with ourselves and with you…but even with the very high level of accommodation that we’re providing both through low rates and very high levels of asset purchases, it will take some time,” Powell added.
In a press conference following the last FOMC meeting in mid-September, Powell said more stimulus is needed from Congress to help an economy struggling with the COVID-19 pandemic.
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