Fed Officials Project No Rate Increases Through 2022

By Nick Timiraos

WASHINGTON -- Federal Reserve officials projected no plans to raise interest rates through 2022 and said they were committed to providing more support to the economy following shutdowns to contain the coronavirus.

Officials also said they would maintain their recent pace of purchases of Treasury and mortgage securities, effectively ending gradual, weekly reductions.

"Over coming months, the Federal Reserve will increase its holdings" of Treasury and mortgage bonds "at least at the current pace to sustain smooth market functioning," officials said in their policy statement released after the meeting.

The statement also attributed improved conditions in stock and other financial markets to policy measures officials have taken in recent months to keep credit flowing through the economy.

The Fed didn't announce other policy changes after its policy meeting Wednesday, but it released economic projections for the first time since December. Chairman Jerome Powell is set to convene a virtual news conference later in the afternoon.

"The Fed is strongly committed to using our tools to do whatever we can for as long as it takes to provide some relief and some stability now, to support the recovery when it comes, and to try to avoid longer-run damage to people's lives through long states of unemployment or to their businesses through unnecessary insolvency," Mr. Powell said during a moderated discussion broadcast online on May 29.

The central bank cut interest rates to near zero in March amid the global coronavirus pandemic, and officials have raced to put in place a series of programs to lend to businesses, cities and states.

Officials affirmed plans in April to hold rates near zero until they are confident the economy is on track for inflation to reach its 2% target and unemployment to fall to the low levels of recent years.

In addition, the Fed has purchased more than $2 trillion in Treasury and mortgage securities since the pandemic sparked a massive flight for safe, cash-like assets in mid-March.

This program has differed from efforts last decade to stimulate the economy by pushing down long-term yields. Instead, officials have said they are primarily interested in ensuring smooth market functioning.

The Fed entered this week's meeting facing some pressure from markets to clarify the aim of these purchases, which it has been reducing every week. The central bank will buy up to $20 billion in Treasurys this week, down from $50 billion six weeks ago, and $375 billion during the week of March 23. It will buy up to $22.5 billion in mortgage bonds.

Fed officials have been successful in restoring market functioning, but other factors, such as rising Treasury issuance to finance economic-assistance measures, are threatening to push up long-term yields this summer.

Last Friday's report that employment rebounded in May sent the 10-year Treasury yield rising by 0.2 percentage point, to 0.94%, last week, though yields retreated somewhat on Monday and Tuesday.

Officials haven't locked themselves into a fixed pace of asset purchases and may not do so now. But Mr. Powell has an opportunity Wednesday to clarify the purpose of those purchases to avoid confusion.

The Fed's goal should be to maintain stable long-term yields without getting too specific about how the central bank will do that, said Robin Brooks, chief economist at the Institute of International Finance. "The language here is tricky," he said.

Potential confusion about the Fed's long-run bond-buying intentions, together with the coming surge of Treasury supply, "invited the kind of selloff we had Friday," said Mr. Brooks. "We don't want financial conditions to tighten on one noisy data point. We just don't."

With rates unlikely to go lower, another major element of officials' policy stance will center on how to communicate their long-run intentions, using what is known as forward guidance.

Minutes from their April meeting indicated they were thinking deeply about guidance that would condition rate moves on certain economic outcomes, such as inflation returning to 2% and unemployment returning to its recent low levels. An alternate approach would tie rate changes to specific dates.

A separate policy review, which was interrupted by the current economic crisis, had built support within the Fed to seek modestly higher inflation after periods in which inflation fell below the 2% target. Officials are still working on that review, which could shape how they define their plans.

They have said they would also examine whether to cap yields on certain Treasury securities by purchasing them as needed to reinforce their forward guidance on rates.

"There is a place for the Fed eventually to engage in some housekeeping to tidy and sharpen up the common understanding of how those policies will be conducted in the longer term, but the urgency is rather low at this point," said David Wilcox, a former senior Fed economist who is now at the Peterson Institute for International Economics.

After acting aggressively in March to avoid a financial crisis, Fed officials have been hesitant to rush out a new monetary policy strategy, even though they have signaled such a shift is in the works.

The Fed's actions have buoyed financial markets for now, with stock markets recently returning to positive territory for the year. But economic crosscurrents have made it hard to diagnose the underlying damage inflicted by the virus.

Waiting until September might give the Fed a better idea of how to calibrate that new policy strategy, in part because of the extremely unusual nature of the current shock. By then, they could know more about any additional economic relief from Congress, the prospect for vaccines and other information about how the virus spreads as commercial activity resumes.

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