The Federal Reserve has raised its financial response to the epidemic, not raising interest rates until at least the end of 2023, and indicates that it will not tighten policy until inflation has been above 2 percent for some time.
The Federal Open Market Committee’s new direction has led to a shift to a more disguised long-term position that the Fed approved last month and could translate into rock-bottom interest rates in the coming years.
“This is about credibility and we fully understand that we need to gain credibility,” Powell said at the end of his press conference on Wednesday. “This framework, we need to support it with our actions, and I think today is a very good first step in doing that. It’s a strong, strong direction. ”
Although the U.S. economy has retreated faster than the Fed predicted at the start of the coronavirus crisis, the recovery is still complete and risky from an uncertain health perspective and rejecting support from monetary policy. It has encouraged Fed officials to debate ways to further strengthen their support for the economy, without withdrawing it.
So far, the Fed has said it will not tighten policy by raising interest rates until it has “seen” recent developments “assessing whether the economy has reached the” maximum employment “and” symmetry 2 percent “targets. Inflation “.
But on Wednesday, the FOMC set more ambitious economic targets. It said, “For some time, inflation will be moderately above 2 per cent so that over time, inflation averages 2 per cent and long-term inflation expectations remain strong at 2 per cent.” It added that it was expected to “maintain an appropriate position in monetary policy until these results are achieved”.
According to the median Fed forecast, U.S. output will fall 6..5 percent compared to the June estimate this year, which will drop to 7..6 percent at the end of the year, compared to its previous estimate of 9.3 percent.
At a news conference after the announcement, Mr. Powell said the forecast would anticipate some additional financial stimulus from Congress. “More financial support may be needed,” he said. “About 11 million people are still leaving work. A good portion of these people were probably working in industries that were likely to fight. ”
The changes to the FOMC statement reflect the US Federal Reserve’s historic new policy framework, published by Mr Powell at the Jackson Hole Symposium last month. He announced that the Fed would tolerate high inflation as long-term consumer price increases fall below the central bank’s 2 percent target.
Two FMC voting members are dissatisfied with the new statement. Dallas Fed President Robert Kaplan said he would like the Fed to maintain more policy rate flexibility, and Minneapolis Fed President Neil Kashkari said he would like to keep the rate close to zero until inflation reaches a “higher target” of 2 percent.
On Wednesday, the Fed added that it would “at least hold Treasury securities and agency mortgage-backed securities at current levels to help maintain market activity and develop appropriate financial conditions, thereby supporting the flow of credit to households and businesses.”
At the moment, it buys U.S. government securities at 120 120 billion per month, 80 80bn in treasuries and 40 40 billion in mortgage securities. Mr Powell said the current rate was an “appropriate” one given the economic and financial background, but acknowledged that the quantitative easing program could be adjusted if approved.
At Mr. Power’s press conference, the long-term Treasury was sold, sending yields on the 30-year note to 1.45 percent, up 0.02 percentage points. The ten-year yield on the benchmark rose 0.01 percentage points to 0.69 per cent, while the policy-sensitive two-year note stood at 0.04 per cent.
Meanwhile, equity markets fell, erasing previous gains on the S&P 500 and falling 0.5%.