First meeting after price swing: Fed does not want to touch interest rate until 2023

For the Fed, full employment is the most important goal in the future. In return, it recently moved away from the focus on price increases. And even if the economy is likely to recover faster than previously assumed, unemployment will remain higher than it was before the crisis.

The US Federal Reserve plans to keep its key rate near zero until the end of 2023. That comes from a forecast published by the Federal Reserve (Fed). The central bank also left the interest rate unchanged on Wednesday. The reason given was that the money market committee was assuming that this interest rate level would be maintained until the goals of full employment and an inflation rate of around two percent were achieved. The Dow Jones index rose on the US stock exchange. Because stocks remain one of the most lucrative investment opportunities for a long time to come.

At the same time, the central bank raised its economic forecasts significantly. For this year, the central bank expects the economy to shrink by 3.7 percent due to the corona crisis. In June, a drop of 6.5 percent was feared. The forecast for the unemployment rate is also more optimistic. It should fall to 7.6 percent by the end of the year, after a forecast of 9.3 percent in June. The Fed expects an unemployment rate of 5.5 percent by the end of 2021. However, that would also be significantly higher than before the escalation of the corona pandemic. In February the rate was still at a very low 3.5 percent.

It was the first monetary policy meeting of the US Federal Reserve after its strategic shift. The Fed also reiterated that it was determined to use the full range of its instruments. To combat the consequences of the corona pandemic, among other things, it had already launched extensive loan programs to support the economy. It left its key interest rate in a range between zero and 0.25 percent.

With its recently changed strategy, the Fed has given itself more leeway in targeting its inflation target. It could now keep the rate of inflation above the targeted optimum value of two percent for a longer period of time if it had previously remained below it for a considerable time. The goal of full employment should come first. After the severe slump as a result of the virus crisis, the US economy is still miles away from that, although the unemployment rate had recently surprisingly fallen to 8.4 percent.

Powell encourages Washington to provide further aid

Central bank chief Jerome Powell said the current crisis was the worst recession in recent history and could not be overcome quickly. In order to achieve a full recovery, not only monetary policy, but also fiscal policy is required, Powell said, referring to the actions of the government and Congress. "My feeling is that it will need more fiscal support." The previous economic stimulus packages were decisive for stabilizing the economy amid the Corona crisis, he said. The negotiations between parliament and government about another economic stimulus package have been stuck in a dead end for weeks.

President Donald Trump's Republicans only want a limited stimulus package of a few hundred billion US dollars, the Democrats recently had a compromise package of 1.5 to 2 trillion dollars. Since the beginning of the Corona crisis, Congress and the government have already decided on economic stimulus packages worth almost three trillion US dollars, which corresponds to more than ten percent of annual economic output.

According to economists, the Fed has now cemented its low interest rate policy for a long time. "The message is that interest rates will remain very low for years, even if the inflation rate increases significantly," said Friedrich Heinemann from the Mannheim research institute ZEW. "In addition, she is now happy to postpone new monetary policy decisions until after November 3, 2020 in order not to influence the presidential election campaign."

. (tagsToTranslate) Economy (t) Corona crisis (t) Economic crisis (t) Economic outlook (t) Economic growth (t) Fed (t) Interest rate decisions (t) Base rate (t) USA