Fed has decided to keep its monetary policy unchanged, with interest rates in a range of between 0% and 0.25% and the purchase programs without new additions

Unchanged meeting in US monetary policy. The Federal Reserve decided to keep its monetary policy unchanged, with interest rates in a range between 0% and 0.25% and purchase programs without new additions or modifications. The US central bank made this decision after its president, Jerome Powell, announced at the end of August, at the Jackson Hole summit, changes to its monetary policy strategy, giving more room to inflation and making new considerations about its full employment measure.

In addition, the entity published its orientation in the form of a point map on interest rates between now and 2024. In it, the vast majority of representatives of the Federal Open Market Committee (FOMC) see interest rates close to 0% at least until the end of 2023. In other words, until 2024, but the forecasts only go until the end of 2023, without going into detail about the height of 2024 for which the representatives see rate changes. The entity thus extends its vision for the future after establishing in June that it would keep rates at current levels until after 2022.

The decision was in line with what analysts expected and the market was trading with relative peace of mind. U.S. stock exchanges accelerated the rises following the announcement, with the S&P 500 rising by more than 1%. However, after the press conference, the index turned down again, with a drop of 0.5% as Powell spoke at the press conference. In turn, the price of 10-year sovereign bonds spinning down, while short-term securities traded flat – signalling a slight disappointment with the lack of changes in the asset purchase program, as some analysts had signalled more long-term ‘treasuries’ purchases to establish greater control of that part of the curve. Anyway, during the press conference, the debt stabilized again.

In his Fed’s statement, he also illustrated changes in monetary policy strategy, mentioning the new monetary policy objectives. The central bank stressed that since inflation has been below the 2% target, its goal now is for the price increase to be “moderately” above that level for “some time” for inflation to average 2%.

To achieve this goal, the Fed is committed not to raise interest rates until labour market conditions have reached levels “consistent” with what the Fed considers “full employment” and until inflation not only reaches 2% but is “on track” to exceed that figure “moderately” for some time. That is, it will be more permissive that price growth exceeds this threshold, and maybe more extreme with its monetary policy, as well as being more tolerant of periods of full employment, as they have found that its impact on prices takes longer to arrive than previously thought.

This new ‘status quo’ was reflected in inflation forecasts for the next few years. The Fed improved its core inflation projections for 2020 from the 1% ratio expected in June to 1.5% now, and slightly in 2021 and 2022 when it expects prices to rise at a rate of 1.7% and 1.8%, respectively. By 2020, the Federal Reserve expects inflation to reach 2%, a year in which, however, representatives expect rates to remain at 0% throughout the year.

At the press conference, journalists asked why the Fed means “some time” when it comes to the inflation target or with “moderately” above 2%. Powell was little eloquent, with answers like “we’re not looking for a single month of inflation at 2%, we’re not looking for a quick way out of this” or “moderate means it’s not big.” As for employment, it exemplified one of the new parameters to consider such as wages or the size of the workforce.

In this sense, the press asked Powell if this meant that the Fed was now going to take into account issues such as wage inequality. “We look closely at disparities in income and financial well-being across demographics and racial categories,” Powell admitted, underlining the economic burden posed by the stagnation of wages at the bottom of the spectrum and low economic mobility. “What happens is that we do not have the tools to address these issues,” he defended, explaining that “when the Fed lowers interest rates, that supports the economy broadly, but we don’t have the ability to focus on particular groups. It’s something we talk about because they are important parts of the economy, but I think they are issues to be addressed by elected representatives.”

Regarding the economic projections, the Federal Reserve improved its view on the decline in GDP in 2020, with it now falling by -3.1% instead of the 6.5% expected in June. However, it also worsened for the next few years, with GDP rising by 4% in 2021 (compared to the 5% expected in June) and 3% in 2022 (in contrast to 3.5% in June).

On unemployment, the Fed expects the US to end 7.6% unemployment this year instead of 9.3% in 2020. It also improved in terms of 2021 and 2022, when it expects the unemployment rate by 5.5% and 4.6%, respectively, from 6.5% and 5.5% in June.

In this sense, journalists also asked Powell about the fiscal response to the ills of the economy and whether it was discounted in economic expectations. “I think that in general there is an expectation that there will be fiscal measures […] the question is how much and when,” Powell settled. “It is very difficult to predict […] if there is no more support for the people and the industry, it will be very difficult for people to find more jobs and reactivate economic activity,” added the president, qualifying that “this would start to be registered in evictions or foreclosures and things that will mark and weigh down the economy.”

Regarding its asset purchase program, the Fed also indicated that it will continue to purchase assets “at least” at their current rate to sustain the functioning of the market and to help achieve more “looser” financial conditions, thus supporting the flow of credit to households and businesses. Analysts expected the monetary institution to indicate an evolution in the commitment of the purchase program from the easing of financial conditions to a faster economic recovery that was reflected in the nuance of “looser financial conditions”.

However, the Fed did not clarify any further vision for the future regarding this program, a matter that a journalist complained about at Powell’s appearance. “Why have only forward-looking guidance for one policy tool when the Fed has talked about two tools working together?” The journalist asked. The Fed chairman slipped away saying that “we said from the beginning that we would try to provide some support and stability in the first phase of the crisis and then we would support expansion when it comes.” “Well, here it is … we have the flexibility to continue changing our orientation when we think it is appropriate,” he concluded.

The only Fed members who voted against this decision were Robert Kaplan, president of the Federal Reserve Bank of Dallas, and Neel Kaskhari, president of the Federal Reserve Bank of Minneapolis. The first did not want to go into detail about the future orientation of the policy and the second wanted a simpler formulation of the new strategic vision. In this regard, Powell said that “we are the first major central bank to undertake these reforms” adding that “there is no recipe book for it.” “Of course there will be a wide range of opinions and I think that is good.”