WASHINGTON: The US Federal Reserve on Wednesday vowed to keep interest rates near zero until inflation is on track to overshoot the US central bank’s 2 per cent target.
But the new guidance also marked the start of a vigorous monetary policy debate as the Fed shifts from a crisis-era focus on keeping markets afloat during the coronavirus pandemic to managing what it now sees as a steady, multi-year recovery.
Underscoring the depth of disagreement and the economic uncertainty that underlies it, the decision drew two dissents, one from a policymaker who thought it went too far, and the other from one who thought it did nt go far enough.
It was also the Fed’s last policy decision before the 3 November US presidential election, delivering the winner a runway of low borrowing costs for years to come.
All but one Fed policymaker saw rates staying at their near-zero level through 2022. Just four saw them higher than that in 2023.
Highly accommodative
“Effectively what we are saying is that rates will remain highly accommodative until the economy is far along in its recovery,” Fed Chair Jerome Powell said in a news conference following the release of the policy statement and new economic projections.
The new promise to “moderately exceed” 2 per cent inflation, he added, “should be a very powerful statement in supporting economic activity”.
With about half of the US jobs lost since the crisis now recouped, and consumer spending about three-quarters recovered, the economy has come farther and faster than most at the Fed had thought just a few months ago.
The new economic projections showed policymakers now see the economy shrinking 3.7 per cent this year, far less than the 6.5 per cent decline they forecast in June. They see unemployment, which registered 8.4 per cent in August, dropping to 7.6 per cent by the end of the year.