WASHINGTON — Federal Reserve policymakers will meet this week for the first time since they significantly revised the Fed’s operating framework in ways that will likely keep short-term interest rates near zero for years to come.
As a result, analysts expect the Fed will keep its benchmark rate unchanged after the two-day meeting that ends today. It has been pegged at nearly zero since March after the pandemic and the measures taken to contain it essentially shut down the economy.
But the statement that Fed policymakers release today is expected to contain revisions that reflect the sweeping changes that Fed Chair Jerome Powell announced late last month in how the central bank operates. The Fed will also issue its quarterly economic projections, which will for the first time include estimates for growth, unemployment and the Fed’s benchmark interest rate for 2023.
Those projections may underscore how long the Fed expects to keep rates low. Analysts expect they will show the Fed foresees keeping its benchmark rate at nearly zero through 2023.
Powell issued the Fed’s new framework at a virtual meeting of economists and central bankers last month. The changes are significant, though some analysts have complained that details of how the changes will be implemented are lacking.
In one key shift, the Fed will no longer follow its longtime practice of raising its benchmark interest rate simply because the unemployment rate has fallen to a low level that could spur inflation. Instead, it will wait for actual evidence that prices are rising. That reflects a view among some high-ranking Fed officials that economic models it has used in the past no longer accurately reflect how the economy works.
Instead, low unemployment and even rising wages no longer necessarily push up inflation, Fed officials believe. With most consumers and businesses accustomed to mild price increases, they have adjusted their behavior in ways that keep inflation low. Businesses, for example, facing global competition, are less likely to pass on higher labor costs to customers.
Lael Brainard, a member of the Fed’s Board of Governors, said earlier this month that if such a policy had been in place in 2015, the Fed likely wouldn’t have started lifting rates that year. Many economists believe that 2015 hike pushed up the value of the dollar, which increased the price of U.S. goods overseas and made imports cheaper, harming U.S. manufacturers.
The Fed also made a critical change to its 2% inflation target, which it formally set in 2012. The central bank now seeks inflation that averages 2% over a period of time, rather than a static target of 2% that ignores previous shortfalls.