Powell: low rates to stay until job, inflation boost

The Fed expects GDP to fall by 3.7% in 2020 instead of the 6.5% it predicted in June

Fed chair Jerome Powell first said last month that the Fed would seek inflation above two per cent over time, rather than just keeping it as a static goal.

"Although we welcome this progress we will not lose sight of the millions of Americans that remain out of work", Powell said.

The Fed left its benchmark interest rate unchanged at almost zero, where it has been pegged since the virus pandemic intensified in March.

Fed officials said in a set of quarterly economic projections that they expect to keep rates at zero through 2023.

"We want to achieve inflation that averages two percent over time", said the Fed chairman.

Inflation, meanwhile, is expected to reach 1.2 per cent by the end of this year, and will gradually pick up before reaching 2 per cent by the end of 2023, the median projection showed.

"The Fed is now more dovish, by a long shot, than it has ever been", said Stephen Stanley, chief economist at Amherst Pierpont. There had been some hopes that the central bank was gearing up to extend the duration of its bond purchases, or ramp up asset purchases more generally, to keep longer bond yields lower and prevent an equity market correction.

Andrew Brenner, head of worldwide fixed income at NatAlliance said the Fed was "nowhere near as dovish as many had thought" with no extension of asset purchases, no increase in buying of longer-end bonds and no yield curve capping, which alongside a view that the Fed will let inflation run, pushed up longer-end yields and hurt equities, he said.

The S&P 500 declined to 3,385.49.

But many analysts were disappointed the Fed was not more specific about how long it wanted inflation to stay above 2%, one likely reason that the stock market ultimately fell.

Lower interest rates decrease the opportunity cost of holding non-yielding bullion.

Normally, the potential customers of lower rates for an extended period stimulate purchasing in equities. But will that be enough to support an economy grappling with a historic shock, especially with Congress at an impasse on additional government spending? Some earlier measures aimed at helping consumers, such as an extra $600 in unemployment benefits, have expired. But he did add: "Even with the risk of a delayed fiscal package, more fiscal support will be delivered".

Sterling was slightly lower at $1.2960 after earlier posting steep losses in the wake of the Bank of England saying it was had briefed on how negative interest rates could be implemented effectively, should it be needed. Since March, the Fed has flooded financial markets with cash by making such purchases and its balance sheet has ballooned by about $3 trillion.

"The Fed is telling investors that they are putting the monetary policy pedal to the metal", said Brian Jacobsen, multi-asset strategist at Wells Fargo Funds, who said that he expects the USA equity market to continue to rally, though at a slower pace than the last six months.

On Wednesday, the latest economic report seemed to support Powell's view of an economy on the mend but not fully healthy.

Against a basket of its rivals, the dollar index rose about 0.32% to trade at 93.493 before erasing most of its gains to trade almost flat on the day at 93.22.



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