Fed Signals Longer Freeze on Interest Rates

The Federal Reserve on Wednesday left interest rates unchanged and dropped its forecast for a rate hike next year.

The Fed’s policy committee said at the conclusion of its two-day meeting that the stance of monetary policy is “appropriate” following the cuts at the previous three meetings. The current policy rate is now between a range of 1.5 percent and 1.75 percent.

The Fed also released new economic projections from Fed officials. These indicate that the Fed thinks the current interest rate target is appropriate to extend the economic expansion through next year. The earlier projections had the Fed raising rates at least once next year.

Now the Fed projections show no hike until 2021.

The Fed has been re-evaluating how unemployment relates to inflation as unemployment rates have continued to fall while inflation has remained low. They now think the long-run, sustainable unemployment rate is lower than they did in the past. The most recent projections show the median forecast is for 4.1 percent unemployment rate in the long-run, down from 4.8 three years ago.

The Fed’s forecast for near term unemployment also declined. The median projection for unemployment next year is 3.5 percent, down from 3.7 percent projected in September. The median projection for 2021 is 3.6 percent and 2022 is 3.7 percent, down from 3.8 percent and 3.9 percent.

Economic growth and the labor market have proved to be far stronger than the Fed had forecast. Three years ago, at the last Federal Reserve meeting prior to President Donald Trump taking office, the Fed forecast that the economy would grow 1.9 percent this year and unemployment would be at 4.5 percent. Unemployment is currently at 3.5 percent and the Fed now thinks the economy will grow 2.2 percent this year.

Despite these misses, the Fed has been hesitant to change its longer-term growth projections. For the last three years, the Fed has been forecasting growth of around 2.0 percent a year or so out and subsequent declines to 1.8 percent. The Fed has, however, slightly upgraded its longer run growth rate from 1.8 percent to 1.9 percent.