'Everything about today was riddled with inconsistencies': Former Fed advisor on interest rate decision
Federal Reserve officials held interest rates near zero and signaled they would stay there for at least three years, vowing to delay tightening until the U.S. gets back to maximum employment and 2 per cent inflation.
The Federal Open Market Committee “expects to maintain an accommodative stance” until those outcomes are achieved, it said in a statement Wednesday that beefed up its description of future policy.
The fresh guidance is the Fed’s first step in an evolving communication strategy after it unveiled a new long-term policy framework to allow inflation to overshoot their 2 per cent target after periods of under-performance.
Announced by Chair Jerome Powell last month, officials expect to refine their approach to economic projections later this year and they may also reach consensus on how to talk about their balance sheet.
“This very strong, very powerful guidance shows both our confidence and our determination,” Powell told a press conference following the decision, though he noted it was still a bit of a work in progress. “There’s no cook book.”
The Treasuries yield curve steepened slightly Wednesday after the decision and as investors digested Powell’s remarks. Ten- and 30-year yields briefly spiked to session highs of 0.70 per cent and 1.46 per cent, respectively while he spoke. That caused the spread between 2- and 10-year yields, along with the gap between 5- and 30-year yields, to widen slightly. Meanwhile, the dollar pared losses.
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“The Fed is really looking to ramp up the economy and allow it to run a bit hotter,” said Yung-Yu Ma, chief investment strategist with BMO Wealth Management. “The Fed wants to signal its long-term commitment to keeping interest rates low, even out to 2023.”
The vote, in the FOMC’s final scheduled meeting before the U.S. presidential election on Nov. 3, was 8-2. Dallas Fed President Robert Kaplan dissented, preferring to retain “greater policy rate flexibility,” while Minneapolis Fed President Neel Kashkari dissented in favor of waiting for a rate hike until “core inflation has reached 2 per cent on a sustained basis.”
Powell and other Fed officials have stressed in recent weeks that the U.S. recovery is highly dependent on the nation’s ability to better control the coronavirus, and that further fiscal stimulus is likely needed to support jobs and incomes.
The Fed on Wednesday committed to using its full range of tools to support the economic recovery. The central bank repeated it will continue buying Treasuries and mortgage-backed securities “at least at the current pace to sustain smooth market functioning.” A separate statement on Wednesday pegged those amounts at US$80 billion of Treasuries a month and US$40 billion of mortgage-backed securities.
Officials see rates staying ultra-low through 2023, according to the median projection of their quarterly forecasts, though four officials penciled in at least one hike in 2023.
In other updates to quarterly forecasts, Fed officials see a shallower economic contraction this year than before, but a slower recovery in the coming years.
“The recovery has progressed more quickly than generally expected,” Powell said, while cautioning that the pace of activity will likely slow and “the path ahead remains highly uncertain.”
In addition to slashing borrowing costs in March, the central bank has pumped trillions of dollars into the financial system through bond purchases and launched a slew of emergency lending facilities to keep businesses afloat.
The economy has partly recovered from the steepest downturn on record and some sectors such as housing are doing well, but Covid-19 continues to kill thousands of Americans each week, unemployment remains high and industries like hospitality and travel are depressed.
Moreover, temporary extra jobless benefits are running out and the political stalemate over a new round of stimulus threatens to set back the economy. Uncertainty could hang over government policies at least until the outcome of the presidential and congressional elections is clear. Republicans including President Donald Trump -- who trails challenger Joe Biden in national polls -- have proposed a smaller package of aid than Democrats have.
Powell said that fiscal measures taken early in the crisis were a big help and more was probably needed.
“The overwhelming majority of private forecasters who project an ongoing recovery are assuming there will be additional substantial fiscal support,” he said, noting around 11 million Americans remain out of work and will require further assistance.
Here are some highlights from the Fed’s latest forecast:
- Gross domestic product: 3.7 per cent contraction in 2020 (June estimate of 6.5 per cent contraction); 4 per cent growth in 2021
- Fourth-quarter unemployment rate: 7.6 per cent in 2020 (June estimate 9.3 per cent), 5.5 per cent in 2021
- PCE inflation: 1.2 per cent in 2020 (June estimate 0.8 per cent), 1.7 per cent in 2021
- Longer-run federal funds rate: 2.5 per cent, unchanged from in June
--With assistance from Kristy Scheuble, Matthew Boesler, Emily Barrett, Craig Torres and Steve Matthews.