U.S. Fed sees interest rates near zero until end of 2023 and fighting the last battle with its new strategy

17 Sep, 2020 02:32
source: Singularity Financial

Singularity Financial Hong Kong September 17, 2020 – It’s no surprise the U.S. Federal Reserve on Wednesday signaled no rate hikes until 2024 at the earliest. Yet the Fed did hint it might increase asset purchases later on if the economy doesn’t show as much progress as expected.

The Fed said it decided to keep rates near 0% and expects this will be appropriate until two things happen: labor market conditions return to the “maximum employment” and inflation has risen to 2% and “is on track to moderately exceed 2% for some time.” Most economists thought the Fed would hold off on its forward guidance until November or December.

The Fed ‘dot plot’ now shows four FOMC members think the central bank will raise interest rates in 2023, up from just two a few months ago. Yet the majority still expect no rate hike at least until 2024.

It is also the first Fed meeting since the central bank formally adopted a new strategy to let inflation run hotter than its 2% target for a time to “make up” for periods of sup-par inflation.

The Fed also said it will continue to purchase at least $120 billion per month of Treasuries and agency mortgage-backed securities to help smooth markets and help “foster accommodative financial conditions.”

According to the median forecast of Fed officials, the economy will contract 3.7% this year, and then grow 4%, 3% and 2.5% the next three years. By the end of 2023, the unemployment rate is expected to drop to 4% while inflation will finally creep back to the 2% target. At least one member of the Fed policy committee thinks inflation will accelerate next year, hitting 2.4%.

“The path of the economy will depend significantly on the course of the virus,” the Fed statement says. This can’t be emphasized enough. The economy is pinned down by the coronavirus, and cannot achieve full recovery until the health crisis under better control.

“The Fed is committed to fighting the last battle, the long, slow recovery experienced in the wake of the Great Recession,” says Tim Duy, the University of Oregon professor who writes the Fed Watch blog. “The Fed is absolutely unprepared for any outcomes on the right-hand side of the distribution. That opens up the risk that the Fed finds itself pivoting in 12 months or sooner.”

The chief economist Mike Fratantoni at the Mortgage Bankers Association reacted,  “Recent key economic data – specifically retail sales and industrial production – indicate that the pace of the economic recovery slowed in August, likely due to the end of some of the fiscal supports to households and businesses. However, the housing market continues to be quite strong, with home sales and home prices growing, and the pace of construction quickening. Lower rates are definitely helping to support the current stretch of strong home purchase demand, while also continuing to generate robust refinance volume.”

After the Fed statement, stocks add to modest gains, with the S&P 500 moving back toward its session high with a gain of 0.4% near 3,414 and the Dow advancing around 230 points, or 0.8%. Yields, which move in the opposite direction of bond prices, haven’t budged much, with the 10-year down 0.5 basis point near 0.669%, while the 2-year is up 0.8 basis point at 0.141%.