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Fed set to keep rate near zero, hint it will stay there longer despite upgraded forecasts

 

The Federal Reserve meets this week amid an economy that has partially rebounded from the punishing COVID-19 recession more swiftly than expected as well as signs that damage from the crisis could linger for years.

 

It goes without saying the central bank has no plans to raise its key short-term interest rate from near zero, where it’s hovered since Fed officials dramatically slashed it in the depths of the pandemic in March.

 

But at a two-day meeting that begins Tuesday, the Fed will update its forecasts, providing a roadmap for the course the economy, labor market, inflation and interest rates could take over the next few years. And it could provide clues about just how long rates will stay at rock bottom.

 

Here’s a rundown of what the Fed is likely to announce Wednesday:

 

·         Guidance on interest rates

Economists had expected the Fed this week to revise its guidance for how long its federal funds rate will stay near zero, based on the new policy framework. Now, the Fed’ statement says near-zero rates will prevail until the Fed “is confident that the economy has weathered recent events.”  

 

Goldman Sachs expects the Fed instead to state the rate won’t budge until the economy reaches full employment and inflation is at or above 2% for a period of time. Since very low unemployment will no longer trigger preemptive rate hikes, Barclays expects the guidance to focus solely on inflation.

 

·         A nod to new policy framework

Goldman expects the Fed to acknowledge its new policy framework by saying that as it considers interest rate changes, it will seek inflation “that averages 2% over time.” The Fed’s statement now refers to its “symmetric 2% objective,” meaning it’s equally concerned about inflation running above or below its goal.

 

·         Bond purchases

The Fed has been buying $80 billion a month in Treasury bonds and $40 billion in mortgage-backed securities, initially to revive markets for those assets that had frozen amid widespread fears in the early days of the pandemic.

 

·         New economic forecasts

The economy has performed somewhat better than expected since the Fed’s last projections in June. Gross domestic product tumbled at a record 31.7% annual rate in the second quarter, a bit better than the initial 32.9% estimate.

 

And while COVID-19 surges in the South and West led some states to pause or reverse plans to allow shuttered businesses to reopen, hospitalizations and death tolls have improved in some states recently. Goldman expects 30% growth in the third quarter, though that would still leave GDP well short of its pre-pandemic level.

 

Barclays expects the Fed to upgrade its GDP forecast for all of 2020 to a 4.5% decline from a 6.5% fall in its June estimate. Goldman reckons Fed officials will show a median estimate of a 3.5% drop.

 


Reference: USA TODAY