Inflation Blues: Fed Keeps Rates Near-Zero, Officially Adopts Average Inflation Targeting

Key Points

  • The FOMC kept rates steady, detailed its new average inflation targeting policy framework, and updated its economic/rates projections.

  • The economic contraction is now expected to be shallower; but the recovery thereafter slower.

  • Highlights of the post-meeting press conference included as assertion that more fiscal relief is needed.

Surprising no one, the Federal Open Market Committee (FOMC) kept interest rates unchanged near zero. However, with greater clarity and precision than in the recent past, the committee signaled it would hold rates steady through at least 2023 as an aid to the pandemic-hit economy. The mostly-dovish statement that accompanied the meeting details the Federal Reserve’s new long-term policy framework around average inflation targeting—previewed by Fed Chair Jerome Powell last month at the annual Jackson Hole Symposium. The policy aims for inflation to overshoot the 2% target, as detailed in the statement: “…with inflation running persistently below” the 2% longer-term inflation target, the FOMC “will aim to achieve inflation moderately above 2% for some time so that inflation averages 2% over time.”

The FOMC vote was not unanimous at 8-2; with Dallas Fed President Robert Kaplan and Minneapolis Fed President Neel Kashkari both dissenting; based largely on language. Kaplan wants “greater policy flexibility,” favoring to keep in the prior language about keeping rates at current levels until the pandemic crisis has been weathered (without time specificity). Kashkari is in favor of waiting for a rate hike until “core inflation has reached 2% on a sustained basis.”

A key part of the statement: “It will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.” Also in the statement was a reiteration of the buying of U.S. Treasuries (USTs) and mortgage-backed securities (MBS) “at least at the current pace to sustain smooth market functioning.” The Committee continues to peg those amounts at $80 billion of USTs and up to $40 billion of MBS. In terms of the FOMC’s updated Summary of Economic Projections (SEP), its members generally see rates staying extraordinarily low through 2023; although four officials expect at least one hike in 2023. The new “dots plot” can be seen below.

“Dots Plot” of Fed Funds Rate Expectations

Source: Charles Schwab, Bloomberg, FOMC Dot Plot, as of 9/16/2020.