Fed sees interest rates near zero until at least 2023

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The Federal Open Market Committee, excluding four members, sees interest rates staying at the zero to 0.25% range they're in now for the foreseeable future, according to the Federal Reserve’s latest Summary of Economic Projections, released after its meeting, which ended Wednesday.

"The Committee expects to maintain an accommodative stance of monetary policy until" it hits its goal of maximum employment and 2% inflation over the long-term, according to its post-meeting statement.

“We will maintain current rate until inflation reaches 2.0%,” Fed Chair Jerome Powell said at his press conference. “Progress has been better than expected, but even so, overall activity is lower than pre-pandemic, and further recovery is unpredictable and uncertain.”

He noted median inflation projections have now “increased to 1.2% for this year, 1.7% next year and 2.0% in 2023.”

The post-meeting statement, "affirmed the Fed’s commitment to use all measures necessary to boost inflation and improve labor market conditions,” according to Mark Heppenstall, chief investment officer at Penn Mutual Asset Management. “With the zero interest rate policy now expected to last through 2023, the Fed continues to give a green light to investors with little near-term risk of removing the markets’ punch bowl.”

Fed Chair Jerome Powell said projections show inflation will reach 2% by the year 2023.

“Today’s statement incorporated the new inflation targeting framework and new language around a commitment to overshoot 2% inflation," said Ed Al-Hussainy, senior interest rate and currency analyst at Columbia Threadneedle Investments. “This is a weak improvement over the forward guidance the Fed has already provided markets. The Fed has retained strategic ambiguity on a range of issues: whether they have the right toolkit to generate higher inflation, how long and to what extent they will tolerate an inflation overshoot, and whether current balance sheet strategy is appropriately accommodative to set the stage for an inflation overshoot.”

The Fed's Summary of Economic Projections showed most participants see rates remaining at the zero lower bound for at least the three years encompassed in the projections. No participants see any hikes in 2020 or 2021, one member sees rates rising 50 basis points in 2022 and four expect rates to go higher in 2023. Over the long term, most panelists see a 2.5% fed funds rate target.

“This economy is supported by a one legged stool, and that leg is Fed intervention,” said Phil Toews, CEO & portfolio manager at Toews Asset Management. “With no fiscal deal in sight, [Powell] will likely be focused on doing everything he can to support the economy.”

The SEP's median expectation of 4.0% GDP growth in 2021 is "overly optimistic," he said, given his belief COVID-19 will be a drag on the economy well into the third quarter of 2021. “Investors should watch carefully to see if the markets continue to believe that Fed action is sufficient to support the economy. If it loses confidence that could be an inflection point,” Toews said.

Bryce Doty, senior vice president and senior portfolio manager at Sit Fixed Income Advisors, LLC, said, it is "not surprising" the Fed left rates at "essentially zero," but called it "shocking" that panelists foresee "no increase in rates for three years."

The Fed's "desire to both keep yields low and get inflation to rise above 2%," he said, is "confusing."

"No bond investor wants to earn less than inflation — it’s like going backwards," Doty said. "So longer term yields are bound to rise as the economy recovers and the Fed stands by and watches inflation rise."

“They see a shallower economic contraction this year than before, but perhaps a slower recovery in coming years, implying a sharper-than-expected rebound followed by slower growth in 2021,” said Gautam Khanna, senior portfolio manager at Insight Investment. “This is mostly mathematical, as the same level of GDP in 2021 shows as slower growth when the fall in 2020 is less severe. The Fed revised up its expectation for the overall level in GDP, and we continue to expect the economy to return to pre-COVID levels of output towards the end of next year.”

Retail sales
Retail sales rose 0.6% in August, after a downwardly revised 0.9% increase in July, first reported as a 1.2% gain, the Commerce Department said Wednesday.

Economists polled by IFR Markets predicted sales would increase 1.0%.

Excluding autos, sales rose 0.7% in the most recent month, lower than the 0.9% economists projected. This follows a 1.3% climb in the previous month, first reported as a 1.9% jump.

Sales are up 2.6% from a year ago, 2.1% excluding autos.

Business inventories
Business inventories nudged up 0.1% in July, after an unrevised 1.1% drop in June, Commerce said Wednesday.

Economists projected inventories to grow 0.2% in the month.

Builder confidence climbed in September, as the National Association of Home Builders' housing market index rose to 83 from 78, marking an all-time high, NAHB said Wednesday.

Economists expected a 78 level.

Business Leaders Survey
Activity in the New York region's service sector “declined modestly,” according to the Federal Reserve Bank of New York's Business Leaders Survey.

The business activity index narrowed to negative 5.4 in September from negative 17.1 in August, while the business climate index edged up to negative 66.5 from negative 74.1, suggesting respondents believe the business climate is worse than usual.

The forward-looking business activity index reversed to positive 6.8 from negative 2.8, and the future business climate index narrowed to negative 5.4 from negative 20.4.

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FOMC Federal Reserve Jerome Powell Monetary policy Economic indicators Federal Reserve Bank of New York Housing