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Fed expected to keep interest rates near zero through 2023

By Don Lee, Los Angeles Times on

Published in Business News

WASHINGTON - The Federal Reserve is likely to keep interest rates pinned near zero at least through 2023, according to projections released Wednesday that also show officials are more upbeat about the near-term outlook for the pandemic-battered U.S. economy.

The Fed's brighter economic outlook reflects the stronger-than-expected recovery in the labor market and consumer spending since more businesses reopened this summer, however halting and uneven that has been.

In June, Fed officials foresaw the unemployment rate at 9.3% in the fourth quarter, but government officials reported the jobless figure dropped to 8.4% in August, from a high of 14.7% in April.

The new projections, issued after the Fed's two-day meeting, show that officials, on average, are now looking for unemployment to end the year at 7.6%. Beyond this year, Fed policymakers had a more sanguine view of both unemployment and gross domestic product, or overall economic output. Three months ago, the Fed saw GDP falling 6.5% this year and then growing 5% in 2021. The Fed now sees GDP contracting 3.7% this year and expanding 4% in 2021.

Still, the outlook remains highly uncertain and hinges on the path of the pandemic. The latest data on jobless claims, small business revenues and consumer spending suggest that the economy more recently has been moving sideways, if not backsliding a bit.

Fed Chair Jerome H. Powell is expected to discuss the new projections at a news conference Wednesday afternoon, as well as address questions about the central bank's newly adopted policy that would keep interest rates lower for longer.

 

The shift in strategy, which Powell announced Aug. 27, means the Fed will focus more on expanding employment and worry less about meeting its long-held 2% inflation target. Inflation has been running well below that target for years, and under the new approach, the Fed would shoot for an average 2% inflation rate, giving it more flexibility to allow inflation to rise above that level for some time before moving to raise interest rates to avert a potential overheating in the economy.

In fact, in its statement Wednesday, the Fed said it "will aim to achieve inflation moderately above 2% for some time so that inflation averages 2% over time and longer-term inflation expectations remain well anchored at 2%." And until those goals are achieved, it said, the Fed would maintain its current easy-money policies.

The policy statement was supported by Powell and seven of his colleagues. Two voting members dissented.

In their projections Wednesday, the vast majority of Fed policymakers see rates staying near zero through 2023, which is as far as the forecast goes. In the longer run, Fed officials expect its benchmark interest rate to rise to 2% to 3%.

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