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Fed likely to maintain 0% rate through at least 2023

Although the economy has picked up, it is still far from early 2020 levels


In a press conference following the FOMC meeting, Fed Chairman Jerome Powell said the economy is likely to continue to need both fiscal and monetary support.

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The Federal Reserve’s interest rate-setting committee voted to maintain its target interest rate in the 0% to 0.25% range at its September meeting.

The rate-setting committee expects to maintain this “accommodative stance” until the labor market achieves conditions consistent with full employment and inflation reaches 2% and is also on track to rise above that.

The Fed will also continue its current pace of purchases of Treasury securities and agency mortgage-backed securities to continue to support the economy. The Fed noted that while economic activity and employment have picked up recently, they remain “well below their levels at the beginning of the year.” And the pandemic is “causing tremendous human and economic hardship across the United States and around the world.”

Considering that inflation has been running below the Fed’s targeted 2% for some time, inflation above this rate would help maintain an average inflation rate of 2% over time.

Going by FOMC members’ forecasts for inflation, it seems the Fed will maintain this 0% rate until at least 2023, when it expects inflation to touch 2%.

Average credit card interest rates for the week of Sept. 16 are at 16%, and with no Fed action anticipated for a while, they are likely to linger in that range.

See related: How to lower your credit card interest rate

Fed more optimistic about economy

The Fed vote was almost unanimous, with only two FOMC members dissenting. Robert Kaplan , CEO, Federal Reserve Bank of Dallas, would prefer the Fed to be more flexible about its policy rate once the economy has weathered the current storm and is on track to achieve the Fed’s inflation and employment goals. And Neel Kashkari, CEO, Federal Reserve Bank of Minneapolis, would prefer the Fed to maintain the current rate until core inflation “has reached 2% on a sustained basis.”

In a Sept. 16 press conference, Federal Reserve Chairman Jerome Powell noted that these dissenting voices bring different perspectives to the FOMC based on their diverse life experiences and careers, and he “wouldn’t have it any other way.”

Fed members’ economic projections show that they are more optimistic about the economy, anticipating at the median that economic output for 2020 will decline 3.7%, compared to their median forecast for a 6.5% GDP decline in June.

They expect that the unemployment rate will be at 7.6% for 2020, from June’s 9.3% forecast. And they expect inflation to be at 1.2% for 2020, up from June’s expectation for 0.8%.

See related: Fed: Card balances fell by $300 million in July

More fiscal stimulus would help

Powell noted that economic activity has picked up from its depressed second quarter levels. The first round of fiscal stimulus from the government has certainly helped consumer spending. Business investment has also picked up.

However, those services that require people to gather closely, such as travel and hospitality, remain impacted. And the outlook remains uncertain with a full economic recovery uncertain until people “feel confident to engage in a range of economic activities.”

He noted that the government’s taxing and spending activities, and its initial “forceful response” have made a positive difference in the recovery so far and “it may take continued support from both monetary and fiscal policy to get back on track.”

In fact, both private and Federal Reserve forecasters anticipate that there will be continued fiscal support for the recovery. The question that remains is how much stimulus and when.

If months pass without action on fiscal stimulus, there could be an impact on people who lost jobs in hard hit hospitality sectors, which could show up in the form of rising evictions and reduced consumer spending. That could scar the economy and these people would find it harder to get back to work.

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