By Yasin Ebrahim
.com – The Federal Reserve kept rates unchanged Wednesday, and reiterated that monetary policy would remain accommodative for a prolonged period to support the economy’s ongoing recovery.
The Federal Open Market Committee left its unchanged in the range of 0% to 0.25%.
The unchanged decision comes just weeks after Federal Reserve chairman Jerome Powell unveiled the central bank’s average inflation targeting regime, designed to allow inflation to overshoot its 2% target in an effort to achieve long-term price stability. The move has raised expectations that rates could be held near zero for longer than would have been the case under the Fed’s previous target, with some market participants forecasting no rate hikes for some time.
The latest economic projections from the Fed appear to support expectations for rates to remain lower for longer, with policymakers backing the central bank to keep its benchmark rate unchanged at 0.1% through 2023.
Many argue that the Fed had raised rates too quickly in the Financial Crisis era, on expectations that inflation would eventually trend toward target, underpinned by a hot labor market. The new approach seeks to avoid a repeat of inflation running below target for a prolonged period.
“With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent,” The Fed said in a statement.
The Fed’s pledge to keep rates near zero and persist with asset purchases has helped support an uptick in economic activity, with the recovery in the labor market currently tracking above expectations.
The central bank expects the economy to contract by 3.7% in 2020, compared with an estimate for a 6.5% decline previously. But growth in 2021 and 2022 was revised lower to 4% and 3% from 5% and 3.5% respectively.
Earlier this month, the Labor Department reported fell to 8.4%, while , the Fed’s preferred measure of inflation, came in at 1.3%.
In the wake of the stronger data, the Fed revised its unemployment rate forecasts for the year to 7.6%, down from 9.3% previously. While inflation is expected to pick up pace and reach 1.2% by year-end, up from a previous forecast of 0.8%.
Looking ahead, the bank sees unemployment falling to 4.6% by 2022, down from a prior estimate of 5.5% previously. While inflation for 2021 and 2022 was revised higher lower to 1.7% and 1.8% from 1.6% and 1.7% respectively, but is set for a faster climb to about 2% in 2023.
The Fed’s balance sheet has increased in recent weeks to over $7 trillion, nearing the June peak of about $7.2 trillion.
Fed Chairman Jerome Powell is expected to field questions on the economy including the outlook for rates following the central bank’s new approach to inflation. The press conference gets underway at 14:30 ET (18:30 GMT).
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