Fed vows to keeps interest rates on hold until inflation rises

The Federal Reserve kept interest rates pinned near zero on Wednesday and promised to keep them there until inflation is on track to “moderately exceed” the US central bank’s 2 percent inflation target “for some time.”

The change in guidance is part of a monetary policy shift announced by the Fed last month that is aimed to offset years of weak inflation and allow the economy to keep adding jobs for as long as possible. But it came at the cost of two dissents, one from a policymaker who thought it went too far, and the other from one who thought it didn’t go far enough.

In its policy statement, the Fed also began to pivot from stabilizing financial markets to stimulating the economy: the Fed said it would keep its current government bond-buying at least at the current pace of $120 billion per month, but described the goal as in part to ensure “accommodative” financial conditions in the future.

US stocks added to earlier gains after the release of the Fed statement, while yields on longer-dated Treasury securities edged higher. The dollar firmed slightly against a basket of major trading partner currencies.

The coronavirus epidemic continued to weigh on the economy, the Fed said in the statement, released after the end of its latest two-day policy meeting, even as officials upgraded their immediate outlook for the economy.

The virus “is causing tremendous human and economic hardship,” the rate-setting Federal Open Market Committee said. “The Federal Reserve is committed to using its full range of tools to support the US economy in this challenging time.”

New economic projections released with the policy statement showed interest rates on hold through at least 2023, with inflation never breaching 2 percent over that time. Policymakers saw the economy shrinking 3.7 percent this year, far less than the 6.5 percent decline forecast in June, and unemployment, which registered 8.4 percent in August, was seen falling to 7.6 percent by the end of the year.

All Fed policymakers saw rates staying where they are through 2022, with four eyeing the need for an increase in 2023.

But in pledging to keep rates low until inflation was moving above the 2 percent target, to make up for years spent below it, the Fed reflected its new tilt toward stronger job growth, announced late last month after a nearly two-year review.

Both dissenters to the statement, Dallas Fed President Robert Kaplan and Minneapolis Fed President Neel Kashkari, took specific issue with the central bank’s guidance that it would keep interest rates where they are “until labor market conditions have reached levels consistent with … maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.”

Kaplan said he would have preferred to have “greater flexibility” once inflation and maximum employment were on track to reaching the Fed’s goals, an easier hurdle to reach. Kashkari’s dissent suggests he wanted a higher hurdle: for rates to stay where they are until core inflation – which often runs cooler than overall inflation – has reached 2 percent “on a sustained basis.”

Fed Chair Jerome Powell began a virtual news conference shortly after the release of the policy statement and economic projections.