MNI POLICY: Fed Strengthens Vow To Keep Rates at Zero

The Federal Reserve vowed to keep interest rates near zero until there is maximum employment and inflation hits 2% and looks set to exceed that target for some time, and said it's prepared to do more if needed to tackle the risks from Covid-19.

"The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals," according to a statement Wednesday from Washington.

The Fed expects it will be appropriate to keep official rates at zero "until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time."

The new guidance on interest rates marked a more concrete description of the Fed's policy stance even as the latest economic forecasts from central bank officials showed both sharp upward revision for growth this year but considerable downward changes for the coming two years.

"Economic activity and employment have picked up in recent months but remain well below their levels at the beginning of the year," the Federal Open Market Committee said in its post-meeting statement. "Weaker demand and significantly lower oil prices are holding down consumer price inflation."

Dallas Fed President Robert Kaplan and Minneapolis Fed President Neel Kashkari both dissented against the decision. Kaplan believes the Fed is binding is hands too tightly with the new forward guidance while Kashkari does not think the Fed's low-rates promises are strong enough.

The Fed's "dot plot" of individual policymaker forecasts showed one Fed member penciling in a rate hike as early as 2022 while as many as four saw monetary tightening in 2023.

Officials offered little new clarity into the future path of the Fed's other primary policy tool, bond purchases. The Committee simply repeated it "will increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions."

Chair Jerome Powell will likely field questions from reporters during the post-meeting press conference about what the central bank can do to make up for the absence of a new fiscal stimulus in Washington. He may also get asked about how persistent dollar weakness might affect the policy outlook.The remotely-held press briefing begins at 2:30 pm.

In response to the pandemic, the Fed cut interest rates to zero in March and launched a number of emergency lending facilities aimed unfreezing key parts of the credit market.

"The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world," the Fed said. "The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments."