Central bank will keep rates at zero until inflation is on track to exceed 2% for some time
The Federal Reserve on Wednesday said it doesn’t expect to raise rates until the end of 2023 at the earliest and it set out new economic conditions that must be met before it will raise them.
In a statement, the Fed said it decided to keep its policy interest rate at near zero and expects this will be appropriate until two things happen: labor market conditions return to the “maximum employment” and inflation has risen to 2% and “is on track to moderately exceed 2% for some time.”
Greg McBride, chief financial analyst at Bankrate.com, said this language means investors should “get used to the low rates because they are here to stay.”
The Fed said again that the path of the economy will depend on the course of the coronavirus pandemic though.
Separately, the Fed released its economic forecasts to 2023. The central bank’s so called “dot plot” of likely interest rates projects no hike through the end of 2023, with only 4 of 17 of the policy making officials penciling in a rate hike.
There were two dissents to the Fed decision. Dallas Fed President Rob Kaplan wanted the Fed to retain greater flexibility once the economy was on track to meet its two goals. Minneapolis Fed President Neel Kashkari wanted the Fed to maintain rates close to zero until core inflation has reached 2% on a sustained basis.
The Fed decision was something of a surprise as most economists thought the Fed would hold off on its forward guidance until November or December.
Fed Chairman Jerome Powell will hold a press conference at 2.30pm ET.
The Fed statement reflects the central bank’s decision in August to adopt new strategy to hit its 2% inflation target over time and not every year. So if inflation under-performs, as it has for the past several years, the Fed will tolerate higher inflation for a time.
Stocks moved higher after the Fed announcement. The Dow Jones Industrial Average
was up 266 points after the statement was released.