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Fed Indicates No Change in Interest Rates Through 2022

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Lower for longer. That’s been the Federal Reserve’s approach to interest rates for quite some time, but today the central bank indicated it will be holding the federal funds rate within its current 0-0.25% range through 2022.

In a statement accompanying its latest economic projections, the Fed said it expected to maintain that range “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

“Recent events,” of course, refers to the coronavirus pandemic that “is causing tremendous human and economic hardship across the United States and around the world, inflecting “sharp declines in economic activity and a surge in job losses,” and is expected to continue to hurt the economy.

The Fed decision was unanimous, and its statement was nearly identical to one released at its late April meeting, but it did deviate somewhat, setting a floor for its purchases of Treasurys, and mortgage-backed and agency securities. The Fed noted it would increase its holdings of those securities “at least at the current pace to sustain smooth market functioning” and would “continue to offer large-scale overnight and term repurchase agreement operations.”

In its economic projections, based on those of individual Fed board members and Fed bank presidents, the Fed projected a median outlook for real GDP of -6.5% this year followed by growth of 5% and 3.5% in the next two years, respectively. Unemployment was projected at a median 9.3% in 2020, falling to 6.5% in 2021 and 5.5% in 2022. Core PCE inflation was projected at 1.9% this year and 2% for the following two years.

These projections “underscore that Fed will be keeping pedal to the medal for the foreseeable future, certainly through the end of this year,” said Kevin Flanagan, head of fixed income strategy at WisdomTree.

That commitment “is a modest positive for stocks and a negative for the dollar,” said Jeffrey Kleintop, chief global investment strategist at Charles Schwab & Co. The Fed sees ”lingering weakness in the economy,” yet its 9.3% year-end unemployment rate projection is “significantly lower than the current 13.3% (and in the single digits),” said Kleintop.

Asked about that surprisingly low May jobless rate number in his press conference on Wednesday, Fed Chairman Jerome Powell said it was “nice to see” and may indicate the job market has hit bottom but that remains unknown.

The S&P 500 index retreated on the Fed’s move, then pared its losses to close at 3,190, down 0.53%. The 10-year bond yield, which had been rising for much of last week, finished the day at 74 basis points.

“The stock market needs something new to push higher,” and it didn’t get that today from the Fed,’ said Patrick Leary, chief market strategist at Incapital.

Investors had been speculating before Wednesday’s Fed decision that the central bank might  introduce new policy initiatives such as a definitive schedule for its securities purchases, such as a regular monthly purchase amount, or a policy of yield curve control. They got neither.

Powell said these possibilities were discussed by Fed policymakers and will be considered in upcoming meetings as the central bank learns more about the trajectory of the U.S. economy.

“We will do whatever we can and for a long as it takes to provide relief and stability and insure the recovery is as strong as possible,” Powell said.

— Check out Gundlach: Stocks Headed for Trouble; Fed Could Bend Yield Curve on ThinkAdvisor.