Thu | Oct 22, 2020

Fed to keep rates near zero

Published:Thursday | September 17, 2020 | 12:07 AM
Federal Reserve Chair Jerome Powell.
Federal Reserve Chair Jerome Powell.

The United States Federal Reserve expects to keep its benchmark interest rate pegged near zero at least through 2023 as it strives to accelerate economic growth and drive down the unemployment rate.

The central bank also said Wednesday that it will seek to push inflation above 2 per cent annually. The Fed left its benchmark short-term rate unchanged at nearly zero, where it has been since the pandemic intensified in March.

The Fed’s benchmark interest rate influences borrowing costs for home buyers, credit card users, and businesses. Fed policymakers hope an extended period of low interest rates will encourage more borrowing and spending, though their new policy also carries risks of inflating stock or causing other financial market bubbles.

The Fed’s moves are occurring against the backdrop of an improving yet still weak economy, with hiring slowing and the unemployment rate at 8.4 per cent.

Its statement says that because inflation has mostly fallen below its target of 2 per cent in recent years, Fed policymakers now “will aim to achieve inflation moderately above 2 per cent for some time”. It also says it will keep rates at nearly zero until “inflation has risen to 2 per cent and is on track to moderately exceed 2 per cent for some time.”

Fed chair Jerome Powell first said last month that the Fed would seek inflation above 2 per cent over time, rather than just keeping it as a static goal.

The change reflects a growing concern at the Fed that in recessions, inflation often falls far below 2 per cent, but it doesn’t necessarily reach 2 per cent when the economy is expanding. Over time, that means inflation on average falls further from the target. As businesses and consumers come to expect increasingly lower inflation, they act in ways that entrench slower price gains.

The Fed prefers a little inflation because that gives the central bank more room to cut or raise short-term interest rates.