US Fed board members expect rates to stay near zero for years

Author: Al Greenwood

2020/09/16

HOUSTON (ICIS)--Board members of the US Federal Reserve expect overnight rates to remain near 0% until at least 2023, according to forecasts the central bank released on Wednesday.

The forecasts accompanied the Federal Reserve's decision to keep the federal funds rate steady at 0-0.25%. The federal funds rate is the rate at which banks lend excess reserves to each other overnight.

The following table shows their projections and compares them with forecasts made in June. The June forecasts did not extend to 2023.

2020 2021 2022 2023 Long Run
GDP -3.7 4.0 3.0 2.5 1.9
June -6.5 5.0 3.5 - 1.8
Unemployment 7.6 5.5 4.6 4.0 4.1
June 9.3 6.5 5.5 - 4.1
Inflation 1.2 1.7 1.8 2.0 2.0
June 1.0 1.5 1.7 - 2.0

In keeping rates near 0%, the Federal Reserve acknowledged that inflation has been running below its long-term goal of 2%.

The Fed said it is now willing to let inflation run moderately above 2%, as long as it averages out to the central bank's long-term goal, and market expectations remain anchored at 2%.

The Fed will keep rates low and maintain other accommodative monetary polices until the US hits that 2% inflation goal.

In addition to keeping rates near 0%, the Fed will increase its holdings of both Treasury securities and mortgage-backed securities.

The Fed's assessment of the economy remains similar to the one it made at the end of July, the last time it voted on rates.

The coronavirus continues to cause economic hardship in the US and around the world. Economic activity and employment have picked up in recent months, but they still remain well below their levels at the beginning of the year.

Weaker demand and significantly lower oil prices are holding down inflation. Overall financial conditions have improved in recent months.

The performance of the economy will depend significantly on the pandemic, which will continue to weigh on the economy, on employment and on inflation in the near term, the Fed said. In the medium term, it poses considerable risks to the outlook of the economy.

The Federal Reserve is the central bank of the US. It has a dual mandate to achieve maximum employment and to keep inflation under control.

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