The Federal Reserve looks likely to keep short-term interest rates near zero for five years or possibly more after it adopts a new strategy for carrying out monetary policy.
The new approach, which could be unveiled as soon as next month, is likely to result in policy makers taking a more relaxed view toward inflation, even to the point of welcoming a modest, temporary rise above their 2% target to make up for past shortfalls.
Fed Chairman Jerome Powell is slated to provide an update on the Fed’s 1-1/2-year-old framework review of its policies and practices when he speaks on Thursday to the central bank’s Jackson Hole conference, being held virtually this year because of the coronavirus pandemic.
“I wouldn’t be surprised if interest rates are still zero five years from now,” said Jason Furman, a former chief White House economist and now Harvard University professor.
That would be good news for some investors. Thanks in no small part to the Fed’s ultra-accommodative monetary policy, the S&P 500 stock-market index is trading at a record high even though the U.S. economy has yet to recover much of the ground it lost in the deepest downturn since the Great Depression as the pandemic took hold.
At their June meeting, all 17 Fed policy makers projected that the federal funds rate they target would remain near zero this year and next. And all but two saw rates staying at that level in 2022. Officials will provide updated quarterly forecasts at their meeting next month, including for the first time projections for 2023.
“We’re not even thinking about thinking about raising rates,” Powell told reporters following the June meeting, in a memorable maxim that he’s repeated since.
Eurodollar futures aren’t currently pricing any premium for Fed rate hikes until early 2023, with a full quarter-point increase priced in toward the end of 2023. Some traders, though, have viewed this as slightly too dovish, with demand emerging for hedges against a steeper path than is currently priced in for 2023 and 2024. Some see ultra-easy monetary policy eventually spurring inflation.
In a sign of economic resilience, government data on Wednesday showed U.S. orders for durable goods rose in July by more than double estimates amid a continued surge in automobile demand, indicating factories will help support the rebound in coming months.
The Fed held rates near zero for seven years during and after the financial crisis before raising them in December 2015. Former Fed Vice Chairman Alan Blinder doubts it will be that long this time, though he adds that he would have said the same thing when the Fed first cut rates effectively to zero in December 2008.