Zero-interest rate expected for at least 5 years from Fed
Zero-interest rate expected for at least 5 years from Fed – In the Fed’s new strategy on monetary policy, interest rates are expected to remain near zero for five years or longer
The Fed will likely keep short-term interest rates close to zero for five years or longer after it sets a new strategy for monetary policy.
In the new approach, which could be unveiled next week, policymakers could adopt a more relaxed view on inflation. To compensate for past misses, they might welcome inflation temporarily exceeding its 2 percent target to a moderate extent.
Fed Chairman Jerome Powell will update the Fed’s one-and-a-half-year policy framework assessment and practices at the Jackson Hole conference on Thursday. The conference will be held in digital this year because of the pandemic.
Jason Furman, a former White House economist, and Harvard University professor, said: “I wouldn’t be surprised if interest rates are still close to zero after five years.” That means good news for some investors. While the US economy has not recovered much yet, the Fed’s overly broad policy has little to do with the S&P 500 Index at record highs.
All of the Fed policymakers predicted at their June meeting that federal funding rates would remain near zero this year and next year. All but two predicted interest rates would remain at that level in 2022. Officials will update their forecast for the quarter next month. It will also be the first 2023 forecasts.
“We’re not even thinking about raising interest rates,” Powell told reporters after the June meeting.”
Euro/dollar futures are not yet pricing in a Fed rate hike until early 2023. A full percentage point rate hike is expected by the end of 2023. But some traders are finding this too Dove because of the hedge demand generated against going on a tougher footpath than is currently priced in. Some think that overly broad monetary policy will eventually trigger inflation.
Low-interest rates for an extended period
The Fed had kept interest rates near zero for seven years until its rate hike in December 2015 in the wake of the financial crisis. Former Fed Vice Chairman Alan Blinder expresses doubt it will take that long this time. But he points out that he said the same thing when the Fed first cut interest rates in December 2008.
Roberto Perli, a former Fed official and partner at Cornerstone Macro LLC, said: “Considering the difficulty of the Fed creating rapid inflation, it is quite conceivable that it would take seven years to raise interest rates.”
Over the past decade, it has taken more than three years for inflation-adjusted GDP to rise to the level before the 2007 -2009 financial crisis. Still, the recovery is expected to be faster this time. Peter Hooper, the global manager of Deutsche Bank’s Economic Research Unit, predicts GDP will reach its first-quarter level in the first half of 2022. Yet he notes that this largely depends on the development and distribution of the vaccine.