The Federal Reserve decided on Wednesday to hold interest rates steady at near-zero, signaling its intention to support a post-COVID economic recovery by keeping rates at the lower bound through at least 2022.
“Financial conditions have improved, in part reflecting policy measures to support the economy and the flow of credit to US households and businesses,” the Fed said in its statement released Wednesday afternoon. The Fed also committed to increasing its asset purchases “over coming months.”
In a set of new economic projections, most of the 17 members of the Federal Open Market Committee appeared to support keeping the federal funds rate in the target range of between 0% and 0.25% through the forecast horizon of 2022. In “dot plots” mapping out each members’ forecasts, only two policymakers saw a case for hiking rates in 2022 (one of which saw four rates hikes by the end of 2022).
By keeping rates low through at least 2022, the Fed hopes it will be able to steer the economy back to its pre-pandemic shape. The decision to hold rates at near-zero was unanimously agreed upon.
The FOMC’s forecast on key economic indicators suggest that those within the central bank expect a gradual recovery.
The median FOMC participant still expects real GDP contracting by 6.5% in 2020 with the unemployment rate at an elevated level of 9.3% by the end of the year. But in 2021, the median projection has unemployment falling to 6.5% and real GDP rebounding by 5.0%.
Some positive signs already arrived in the form of last Friday’s jobs report, which showed unemployment ticking down as 2.5 million jobs were added back to the economy.
Despite unprecedented fiscal relief and the Fed’s ballooning balance sheet, Fed officials do not expect inflation to meaningfully appear. The median FOMC policymaker forecasts low inflation (as measured in core personal consumption expenditures) of just 1.0% in 2021, rising moderately to 1.5% in 2021. The central bank’s inflation target is 2%.
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