Fed’s latest signals suggest rates on hold until 2023

After its latest meeting on Wednesday, the Federal Reserve promised again to keep interest rates near zero, keeping them there until inflation hits the Fed’s target 2% range and beyond.

Again committing to “using its full range of tools to support the U.S. economy” during the ongoing COVID-19 pandemic, a post-meeting statement from the Fed reiterated the central bank’s goals of maximum employment and price stability.

With that in mind, the Fed elected to keep federal funds rate at 0-0.25%, despite a shift in Fed officials’ forecasts to reflect a lower unemployment rate and smaller GDP dip for 2020. Commentary from Wells Fargo Securities’ Economics Group described the overall tone of the Fed’s statement as “dovish,” noting that while economic activity and hiring have picked up in recent months, both remain “well below their levels” pre-pandemic.

In particular, 13 of 17 participants in the Federal Open Market Committee indicated that they now envision rates remaining in the current range until 2023.

Additionally, per its statement, the Fed will increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace — $80 billion per month for the former and $40 billion for the latter — to keep market conditions stable.

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“The Fed’s new framework to keep rates low until inflation visibly rises beyond their 2% target will mean that liftoff from zero will occur later than in the last cycle — allowing the unemployment rate to fall even further than the 50-year low we saw in February,” said Mike Fratantoni, senior vice president and chief economist for the Mortgage Bankers Association.

While acknowledging that recent data suggests that the economic recovery actually slowed in August, Fratantoni added that rates staying anchored near zero will mean more good news for the sizzling housing market.

“Lower rates are definitely helping to support the current stretch of strong home purchase demand,” Fratantoni said, “while also continuing to generate robust refinance volume.”

Speaking at a press conference after the Wednesday meeting, Fed chair Jerome Powell acceded that he thinks some parts of the economy will continue to struggle without more legislative stimulus. But Powell also added that the Fed still has lots of options of its own to help the economic recovery gain more steam, citing lending tools, forward guidance and the Reserve’s balance sheet.

“I certainly would not say that we’re ‘out of ammo,’” said Powell. “Not at all.”


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