Federal Reserve stresses commitment to low rates for the long run

The Federal Reserve pledged on Wednesday to keep its low interest rate policies in place even well after the economy has sustained a recovery from the viral pandemic.

The Fed said in a statement after its latest policy meeting that the improvement in the economy and job market has slowed in recent months, particularly in industries affected by the raging pandemic. The officials kept their benchmark short-term rate pegged near zero and said they would keep buying Treasury and mortgage bonds to restrain longer-term borrowing rates and support the economy.

The policy-makers also warned that the virus poses risks to the economy and removed a phrase from their previous statement that had said the risks were “over the medium term.” The removal of this phrase suggested that Fed officials are unsure how long the uncertainty will last.

For now, the job market, in particular, is faltering, with nearly 10 million jobs still lost to the pandemic, which erupted 10 months ago. Hiring has slowed for six straight months, and employers shed jobs in December for the first time since April. The job market has sputtered as the pandemic and colder weather have discouraged Americans from travelling, shopping, dining out or visiting entertainment venues. Retail sales have declined for three straight months.

At a news conference, Chair Jerome Powell was pressed on whether the Fed should respond to the recent speculative surge in the prices of some individual stocks, notably shares of GameStop, and whether that buying frenzy suggested a dangerous bubble in overall stock prices. Powell deflected the questions by saying the Fed’s interest rate policies aren’t well-suited to address speculation in the stock market.

In addition, he said, “if you look at what’s really been driving asset prices in the last couple of months, it isn’t monetary policy. It’s expectations about vaccines and also fiscal policy. Those are the news items that have been driving asset values in recent months.”

In its statement Wednesday, the Fed added a reference to vaccinations — a sign that the policy-makers, along with most economists, envision a sharp rebound in the second half of the year as the virus is brought under control by vaccines and government-enacted rescue money spreads through the economy. Americans fortunate enough to have kept their jobs have stockpiled massive savings that suggest pent-up demand that could be unleashed, with a big lift to the economy, once consumers increasingly feel safe about resuming their old spending patterns.

Asked about how the rollout of the vaccines might affect Fed policy, Powell said: “There’s nothing more important to the economy now than people getting vaccinated. If you think about the places where the economy is weak, as I mentioned bars and restaurants. That’s 400,000 jobs we lost last month, and that’s all because of the spread of the pandemic.”

He added: “We have not won this yet. We need to stay focused on it as a country and get there.”

The Fed has signalled that it expects to keep its key short-term rate at a record low between zero and 0.25% through at least 2023. Earlier this month, vice-chair Richard Clarida said he expects the Fed’s bond purchases to extend through the end of this year, which would mean continued downward pressure on long-term loan rates.

Since the Fed last met, in mid-December, there has been some good news. The distribution of an effective vaccine has begun, and a $900-billion relief package was enacted in late December. President Joe Biden has since proposed another financial support plan — a $1.9-trillion package that is larger than many economists had expected and will require congressional approval.

In recent months, Powell had repeatedly urged Congress and the White House to provide such stimulus. Some central bank officials have suggested that they might consider withdrawing Fed stimulus later this year, earlier than investors generally expect, although Powell contradicted that view in a public appearance earlier this month.

In December, the Fed said it would continue its bond purchases until “substantial further progress” had been reached toward achieving its goals of low unemployment and stable inflation of about 2% a year.

The Fed wants to avoid a repeat of 2013, when Chairman Ben Bernanke told Congress that the Fed was considering tapering the bond buys it was then engaged in. Bernanke’s remark caught markets unaware and sent longer-term rates jumping — an event that came to be dubbed the “taper tantrum.”

The Fed’s drive to keep long-term rates low have helped hold down mortgage rates and fueled home sales and price increases. In November, U.S. home prices jumped at their fastest pace in more than six years, surging 9% compared with 12 months earlier, according to the S&P CoreLogic Case-Shiller 20-city home price index.

The prospect of additional stimulus and ongoing vaccinations has raised some concern that as Americans eventually release pent-up demand for airline tickets, hotel rooms, new clothes and other goods and services, the economy might accelerate and annual inflation could surge above the Fed’s 2% target. If many companies don’t initially have the capacity to meet that demand, prices would pick up. Yet most Fed officials appear unconcerned about those trends potentially igniting runaway price increases.

One reason the Fed isn’t expected to raise rates anytime soon is that it adopted a framework last year that calls for inflation to average 2% over time. Given that inflation has mostly languished below that level since the Fed adopted it as a target in 2012, policy-makers would have to let inflation run above 2% for some time to make up for the years of below-target price increases.