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Federal Reserve holds rates steady in upbeat US economic forecast

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The US Federal Reserve opted to keep interest rates near zero today, but improved its projections for the US economy while it waits for inflation to improve.

The Fed promised to hold interest rates until inflation gets on track to “moderately exceed” its two per cent inflation target “for some time”.

Fresh forecasts showed it intends to keep interest rates on hold until at least 2023, with inflation never surpassing two per cent over that time.

Meanwhile the body upgraded economic growth to minus 3.7 per cent for this year, an improvement from the minus 6.5 per cent forecast in June.

Unemployment is expected to fall to 7.6 per cent by the end of 2020, compared to June’s 9.3 per cent forecast.

However there were two dissenting opinions. One policymaker thought the decisions went too far, while the other thought they didn’t go far enough.

In a pivot away from stabilising financial markets and towards stimulating the local economy, the Fed said it would keep its current government bond-buying at least at the current pace of $120bn per month to ensure an “accommodative” future financial environment.

Employment had already rebounded more strongly than expected after ballooning when lockdowns were tightest, falling to 8.4 per cent in August despite June’s pessimistic forecast.

The Dow and S&P 500 added to today’s gains after the statement, with the Dow rising more than one per cent while the Nasdaq turned green.

US President Donald Trump will be buoyed by the improved economic projections. Although his plans to campaign for November’s presidential election on the economy have been dented, he has touted the jobs rebound.

Earlier today, the OECD upgraded its prediction for the US economy this year. It said it will contract by a still-enormous 3.8 per cent. But that was a massive upward revision from the 7.3 per cent collapse previously expected.

However, the recovery in the US economy could be derailed if lawmakers on Capitol Hill fail to agree on another stimulus package. Fed chair Jay Powell has made it clear that the economy needs more government support. 

The Bank of England will decide on its monetary policy tomorrow. Analysts predict it will leave interest rates on hold at 0.1 per cent and its bond-buying target unchanged at £745bn.