The Fed Plans to Keep Interest Rates Low Until Inflation Catches Up
January 18, 2022
Federal Reserve Officials are planning to keep loan interest rates historically low and near zero through at least 2023.
This is a tactic to hopefully help the rest of the economy back to full strength after the recession caused by the pandemic brought things to slump. All of this was communicated in their September policy statement and economic projections released in the first week of September.
The Fed also made a large and notable update to their official policy statement by reinforcing a pledge from August to allow small price raises to help offset periods of weak inflation. They stated that Fed chairman, Jerome H. Powell, and colleagues look to be very patient while trying to help the economy along in months and even years to come.
These actions are reactions to two large economic issues: one affecting things right now as the pandemic leaves millions out of work and may cause companies to release even more employees, the other a longer-term impact centered on inflation and interest rates that continue to decrease as they threaten economic stagnation.
They believe central bank policies will be key to restoring growth and strength in the labor market. The Fed hopes that the extended period of cheap loans will bring demand and lift prices.
In the early September statement, the Fed stated they expect to hold rates steadily low until the job market reaches what they deem to be full employment and inflation rises to 2 percent with forecasts to keep steadily growing at the same pace. This is a change from their old practices of raising rates as a response to a drop in unemployment and the expectation of inflation to rise. They are now waiting for inflation to actually do so before raising rates again.
This change has not been met with warmth by all though, Robert S. Kaplan of the Federal Reserve Bank of Dallas and Neel Kashkari of the Minneapolis Fed did not vote for these changes. Kaplan stated he did not want to tie interest rates tightly to real-life inflation results and that keeping some wiggle room would enable the rates to be raised earlier. Kashkari believes that the Fed should commit to a longer period of low rates and not raise them until the 2 percent has been reached and sustained for some time.
Rates have been historically low for much of 2020 and these low-interest rates have helped to bring positive growth with the encouragement of home refinances, business investments, and many other types of new loan openings.
Many smart investors have already forecasted that interest rates would stay low for years to come, but the announcement by the Fed just backed up this outlook.
Cutting federal funds rates is not the only thing the Fed is using to try and help the economy right now. The central bank is also purchasing large numbers of mortgage-backed and Treasury owned securities. The motive behind this is to help stabilize markets and to also help stimulate the economy by pushing down long-term interest rates. This can also encourage other investors to purchase riskier assets with higher payoffs.
Though the measures the Fed are taking are to help the economy get back on track, they say the country will still need the help of Congress to authorize direct spending and help the economy continue its recovery. Fed officials expect the unemployment rate to hover around 7.6 for the rest of 2020. This is lower than previously expected, but still much higher than the pre-pandemic rate of 3.5%.
Regardless, rates are expected to stay low for the foreseeable future to help bring the American economy back around. This can mean some very positive things for anyone looking to take out a loan right now.
How can low-interest rates benefit you today?
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