Fed Likely to Keep Interest Rates Near Zero as Economy Stumbles
January 27 2021 - 5:59AM
Dow Jones News
By Jon Hilsenrath
Federal Reserve officials are likely to acknowledge recent signs
of economic weakening but keep policy on hold at a meeting that
concludes Wednesday, choosing to wait and see if business activity
picks up.
The Fed has set short-term interest rates near zero, launched a
bond-purchase program of $120 billion a month, and said it would
keep stimulative measures in place until its goals of lower
unemployment and 2% inflation are achieved.
Last month marked a setback, because the virus resurged and many
states in response resumed business shutdowns. Employment and
retail sales fell in December, and the number of Americans filing
new claims for unemployment benefits has been rising since
November.
However, Fed officials have said they believe the setback is
temporary.
They think the economy will bounce back later this year as
vaccines are more widely distributed and begin to bring the deadly
coronavirus pandemic under control. That, in their estimation,
would allow restaurants, hotels, airlines and other businesses to
begin moving back toward operating at full capacity.
Rebuilding the economy fully, after the permanent loss of many
businesses and jobs, will take additional time, officials have
said.
"The economy is far from our goals," Fed Chairman Jerome Powell
said earlier this month at a Princeton University forum. Now isn't
the time to be pulling back from its policies, he added.
Congress and the White House in December approved $900 billion
in new spending measures to address the pandemic and its economic
effects, including sending $600 checks to many Americans. The money
could pad household savings and lead to additional consumer
spending.
The Biden administration has proposed $1.9 trillion in
additional measures, including sending $1,400 checks to many
households.
Fed officials are effectively waiting and watching to see the
effects of these measures and whether their projections for the
economy prove correct.
The Fed estimates U.S. economic output will grow 4.2% in 2021
and the unemployment rate will drop to 5% by year's end from 6.7%
in December. It sees the jobless rate falling further to 4.2% by
the end of 2022.
"The Federal Reserve is committed to using its full range of
tools to support the U.S. economy in this challenging time, thereby
promoting its maximum employment and price stability goals," it
said in a policy statement after its December meeting.
Rates will remain low and its bond purchases will continue until
its goals are achieved, it added. The bond purchases are aimed at
holding down long-term interest rates in combination with the
short-term interest rate, which it has set near zero.
Low rates are designed to encourage borrowing, spending and
investment, boosting overall economic activity. The effects are
already being felt in some sectors that are especially sensitive to
borrowing costs, such as housing. Home prices in large metro areas
were up 9.5% from a year earlier in November, according to the
S&P CoreLogic Case-Shiller National Home Price Index. U.S. home
sales in 2020 surged to their highest level in 14 years.
The borrowing rate on a 30-year fixed rate mortgage is around
2.75%, down from 3.6% a year ago, according to Freddie Mac, a large
government-backed mortgage company.
Fed officials also expect inflation to pick up in the months
ahead, though they aren't convinced it will be lasting. Consumer
price inflation has run almost a half percentage point below the
Fed's 2% objective on average since it established that goal in
2012.
Write to Jon Hilsenrath at jon.hilsenrath@wsj.com
(END) Dow Jones Newswires
January 27, 2021 05:44 ET (10:44 GMT)
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