Fed Pledges Low Interest Rates for Years, and Until Inflation Picks Up

Fed officials are mulling when and how to update their asset purchase program, and said Wednesday that they would maintain purchases at “at least” their current pace to “sustain smooth market functioning and help foster accommodative financial conditions.”

The Fed updated its Summary of Economic Projections, a set of estimates for how the economy and interest rates will develop in coming years. Officials saw unemployment ending 2020 at a lower rate: The median official expects the rate to average 7.6 percent over the final three months of the year, compared with 9.3 percent when the Fed released its last set of projections in June.

That change came after the jobless rate declined from 14.7 percent in April to 8.4 percent in August, a faster drop than most economists had expected. The median Fed official does not expect interest rates to climb higher through the end of the 2023, the projections showed, and sees inflation returning to 2 percent only that year.

Still, the Fed’s tools are limited and Mr. Powell once again noted that more fiscal support — the kind of direct spending that only Congress can authorize — will be needed to help the economy continue its recovery. Mr. Powell said much of the economic improvement was a result of that spending, saying “the fiscal policy actions that have been taken thus far have made a critical difference,” Mr. Powell said.

“My sense is that more fiscal support is likely to be needed.”

The Fed has taken a series of sweeping steps to try and prop up the economy, including establishing lending programs aimed at keeping credit flowing to households and businesses. But it is facing a significant challenge as it tries to restore the labor market to pre-pandemic levels. Millions of people remain out of work and it is unclear how quickly — or even if — all of those workers will find re-employment.

“The labor market has been recovering, but it’s a long way, a long way, from maximum employment,” Mr. Powell said, adding that the recovery will move most quickly through areas that were not directly affected by the virus. Parts of the economy facing a direct hit — like airlines, sports stadiums and restaurants — “are going to be challenging for some time.”

“It’s millions of people,” he said, adding that it is the Fed’s job “not to forget those people.”

As part of that effort, Mr. Powell in August announced that the Fed was shifting its policy strategy, and no longer planned to lift interest rates simply because the unemployment rate had dropped below levels it saw as sustainable. Officials also said they would adopt an average inflation target, aiming for 2 percent over time rather than as an absolute goal — implying that the Fed would sometimes allow price increases to run slightly higher.

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