Fed holds rates near zero but expects economy to improve in 2021
The Federal Reserve said during its final meeting of the year on Wednesday that it would continue holding interest rates near zero and underscored its promise to aid the economy’s recovery from the coronavirus pandemic, but painted a brighter outlook for 2021.
The U.S. central bank, as widely expected, held the benchmark federal funds rate at a range between 0% and 0.25%, where it has been since mid-March.
Updated guidance shows that Fed officials expect rates to remain near zero through 2023.
But officials also changed their projections to reflect a smaller decline in the nation’s GDP; they now anticipate real GDP to fall just 2.4% this year, compared to a decline of 3.7% predicted in September. On the unemployment side, the Fed forecast the rate will fall from 6.7% to 5% by the end of 2021.
“As expected, the FOMC left interest rates at the zero lower bound, and reinforced its projections for them to remain so at least through 2023 via the new dot plot,” said Jason Pride, chief investment officer of private wealth at Glenmeade. “This should prime the U.S. economy for a more robust recovery when a vaccine-driven rebound prompts the return to some semblance of ‘normal.'”
The economic outlook has changed drastically since policymakers met at the beginning of November with the approval of one COVID-19 vaccine that’s already being administered across the country and optimism rising that Congress will pass another round of emergency aid before the end of the year. Still, coronavirus infections are surging across the nation, prompting state and local governments to issue new lockdown measures.
The meeting caps a volatile year for the economy and the Fed, which sprang into action at the beginning of March to prevent an economic collapse by slashing interest rates, launching a dozen lending facilities to support the credit market and injecting nearly $2.8 trillion into the economy — an unprecedented amount.
The rate-setting Federal Open Market Committee will continue to buy at least $120 billion of bonds each month “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals,” it said in a statement.
Chair Jerome Powell and other Fed officials have repeatedly urged Congress to another round of emergency aid to help the nation get through what’s expected to be a difficult winter, with cold weather limiting business activity and a surge in COVID-19 infections triggering new restrictions.
Powell echoed that sentiment again on Wednesday, telling reporters during a press conference that the next “four, five, six months will be difficult.”