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Fed Projects Patience Even as Economic Outlook Brightens

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Federal Reserve officials signaled on Wednesday that they are in no rush to dial back support for a pandemic-damaged economy, releasing a fresh set of projections that showed the central bank’s policy interest rate on hold at near zero for years to come — even as the outlook rapidly improves.

After a painful 2020 in which the Fed pledged to do whatever it took to prevent lasting virus-inflicted economic damage, the decision underscored that the policy response has moved into a new stage: As long as it takes.

Fed officials, who cut their policy rate to near zero last March, maintained that setting on Wednesday, as was widely expected. Keeping it at rock bottom lowers borrowing costs across the economy, fueling demand and stoking growth.

But their new forecasts sent a remarkably patient message about the path ahead. Most policymakers expected interest rates to remain near zero through 2023, even as they penciled in faster growth, rapidly falling unemployment and inflation rising above 2 percent.

By promising continued help in the face of a brightening outlook, the central bank underlined its key priorities, which center on coaxing the job market back to full health while nudging prices — which have been sluggish for years — sustainably higher. And it made clear that it is more concerned with standing by the fledgling rebound than with warnings that inflation could get out of control.

“We’re committed to giving the economy the support that it needs to return as quickly as possible to a state of maximum employment and price stability,” Jerome H. Powell, the Fed chair, said during a news conference on Wednesday. That help will continue “for as long as it takes.”

Fed officials noted in their postmeeting statement that some parts of the economy were improving, and Mr. Powell said Covid-19 vaccines and fiscal stimulus had driven his colleagues’ sunnier economic expectations. But he also pointed out that the unemployment rate remained elevated, and that 9.5 million jobs that had disappeared during the pandemic were still missing from the economy.

“It’s just a lot of people who need to get back to work, and it’s not going to happen overnight, — it’s going to take some time,” Mr. Powell said. “The faster, the better. We’d love to see it come sooner rather than later.”

Fed officials now think that unemployment will fall to 4.5 percent this year as growth surges, a quicker decline than previously anticipated, and that inflation will pop to 2.4 percent in 2021 before easing. They see it hovering around 2.1 percent by the end of 2023.

That they are willing to allow inflation to move higher without reacting backs up the central bank’s new approach to monetary policy. The Fed said last year that it would stop raising rates pre-emptively to choke off coming inflation and would aim for 2 percent as an average goal — meaning it welcomes periods of slightly faster price gains.

“You look at their economic forecasts, they are all better,” said Priya Misra, head of global rates strategy at TD Securities. “They’re telling the market that they will let inflation go above 2 percent.”

Wednesday’s release of economic projections was closely watched on Wall Street, in part because the central bank had a lot of new information to digest and incorporate into its policy guidance.

Since the Fed last updated its economic projections three months ago, Congress and the White House have passed two large spending packages — a $900 billion bill in December and a $1.9 trillion measure this month. That huge infusion of government cash will put money in consumer bank accounts and could help to avert economic damage that Fed officials had worried about, like bankruptcies and evictions.

The Treasury Department said on Wednesday that 90 million direct checks to individuals, totaling more than $242 billion, had already been disbursed.

Americans are also receiving vaccinations at a steady pace, spurring hope that the pandemic might abate enough to allow hard-hit service industry companies to reopen more fully at some point this year.

To add to those positive developments, coronavirus cases have eased, and the unemployment rate suggests that the economy continues to slowly heal. Joblessness fell to 6.2 percent in February, the latest Labor Department data showed, down from a peak of 14.8 percent in April.

But there is a long way to go — a broader measure of joblessness that Fed officials often cite is around 9.5 percent — and Mr. Powell pointed out repeatedly that uncertainty remained high.

“The path of the virus continues to be very important,” he said, noting that new and virulent strains have emerged. “We’re not done, and I’d hate to see us take our eye off the ball before we actually finish the job.”

Congress has tasked the Fed with guiding the economy back to full employment and stable prices. Mr. Powell and his colleagues have been clear that they want to see both a healthy job market and inflation that has risen slightly above 2 percent, and is expected to stay there for some time, before lifting interest rates.

The March economic projections showed that officials widely expect the economy to take years to clear those hurdles. Just seven officials penciled in rate increases by the end of 2023, while 11 saw rates remaining on hold.

The Fed is also buying $120 billion in government-backed bonds per month. It has been less clear about the criteria for slowing those purchases, saying it needs to see “substantial” further progress.

Mr. Powell indicated on Wednesday that the Fed was not ready to even start talking about when it might reduce that support. When it is, he said, it will signal so “well in advance of any decision to actually taper.”

Markets have been on edge in recent weeks. An improving economic outlook and the prospect of slightly higher inflation have pushed up rates on longer-term Treasury securities. That has at times caused stocks to swoon — share prices tend to fall as interest rates increase — though key indexes remain near record highs.

Some of that unease ties directly to Mr. Powell’s central bank. Investors have come to expect that the Fed will be less patient than they previously anticipated against the brightening backdrop, pulling forward estimates of when the Fed might lift interest rates.

In fact, some prominent economists and commentators have warned that the government’s big spending, which dwarfs the response to the 2008 crisis, risks pushing prices much higher by pumping so many dollars into an already-healing economy. That could force the Fed to lift rates sharply to control them.

But Fed has consistently downplayed those concerns, pointing out that the problem of the modern era has been weak prices — which could risk destabilizing outright price declines, and which saps the Fed’s ability to cut inflation-inclusive interest rates in times of trouble. If prices do take off, officials often say, they have the tools to deal with that.

“They want a rapid recovery, even more than usual,” said Diane Swonk, chief economist at Grant Thornton. “The Fed doesn’t want to get in the way of it because of a transitory jump in inflation.”


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