Lower for even longer as Fed holds fire on interest rates

Russell Lynch
·2-min read
Federal Reserve
Federal Reserve

Interest rates will be held near zero for at least three more years as the US economy struggles to recover the economic ground lost to Covid-19, the Federal Reserve signalled on Wednesday.

The world’s most powerful central bank held interest rates unchanged at 0 to 0.25pc after drastic cuts in February and March to battle the shock of a pandemic that has claimed almost 200,000 American lives.

Fed chairman Jay Powell has given himself more firepower to boost the economy after switching to a new “average” inflation targeting regime in August. 

Rate-setters now have the leeway to allow inflation temporarily above 2pc without squeezing the brakes, and they will worry less about an overheating jobs market. 

The Federal Open Market Committee’s statement said rates would be on hold until inflation is on track “to moderately exceed 2pc for some time”.

The latest forecasts showed a majority of committee members believe rates will remain close to zero through 2023, although four members believe at least one increase could be needed. 

The US economy collapsed at a record annualised pace of 31.7pc between April and June and although growth will recover in the current quarter, signs of fading momentum have emerged.

The expiry of the $600 a week in emergency benefits at the end of July, which left two-thirds of claimants better off than in work, took the wind out of consumer spending in August. Stripping out volatile fuel and food prices, retail sales sank 0.1pc. 

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The economic fears also put further pressure on the White House and Congress to break the deadlock and agree a new stimulus package for the world’s biggest economy.

With two months to go until Donald Trump faces re-election, the President has urged Republicans to back a new $1.5trn compromise package and “go for the much higher numbers” after the party initially rejected Democrat demands. 

Richard Flynn at Charles Schwab said: “The Fed has indicated that the federal funds rate is likely to be held near zero for several more years until it sees inflation rise, while expanding its balance sheet and using its special facilities to lend.

“However, these tools are stretched already. Many Fed officials have been urging Congress to pass more fiscal relief, as that would likely have a more immediate effect in boosting growth, employment, and inflation.”