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Fed touts economic recovery, vows to keep interest rates low

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WASHINGTON (Reuters) — The Federal Reserve on Wednesday vowed to keep interest rates near zero until inflation is on track to overshoot the U.S. central bank’s 2% target, a bold new promise aimed at bringing millions of out-of-work Americans back to the labor market.

But the new guidance also marked the start of a vigorous monetary policy debate as the Fed shifts from a crisis-era focus on keeping markets afloat during the coronavirus pandemic to managing what it now sees as a steady, multi-year recovery.

Underscoring the depth of disagreement, and the economic uncertainty that underlies it, the decision drew two dissents, one from a policymaker who thought it went too far, and the other from one who thought it didn’t go far enough.

It was also the Fed’s last policy decision before the Nov. 3 U.S. presidential election, delivering the winner a runway of low borrowing costs for years to come. All but one Fed policymaker saw rates staying at their near-zero level through 2022. Just four saw them higher than that in 2023.

“Effectively what we are saying is that rates will remain highly accommodative until the economy is far along in its recovery,” Fed Chair Jerome Powell said in a news conference following the release of the policy statement and new economic projections.

The new promise to “moderately exceed” 2% inflation, he added, “should be a very powerful statement in supporting economic activity.”

With about half of the U.S. jobs lost since the crisis now recouped, and consumer spending about three-quarters recovered, the economy has come farther and faster than most at the Fed had thought just a few months ago.

The new economic projections showed policymakers now see the economy shrinking 3.7% this year, far less than the 6.5% decline they forecast in June. They see unemployment, which registered 8.4% in August, dropping to 7.6% by the end of the year.

The recovery “is here, and it’s well along,” Powell said.

And even as the virus continues to cause “tremendous human and economic hardship,” he said, “we are learning to live with Covid, which still spreads,” Powell said. Social distancing and the use of masks allowed much of the economy to regain ground lost in the second quarter, he said. That contraction was the worst suffered by the United States in the post-World War Two era.

But with parts of the economy, like the travel and entertainment sectors, likely to take longer to revive, millions will still struggle to find work.

The recovery, Powell noted, is expected to slow, requiring continued support from further government spending and, he said, the Fed, which is continuing to debate further actions including a possibly faster pace of bond buying.

Or, as the central bank’s policy-setting Federal Open Market Committee said in the dry language of its statement after the end of its two-day meeting, “The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.”

 

 


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