Lower for longer, until better than ever

Sep 23, 2020 | Jay Zhang


The Fed now expects a nearly complete economic recovery by 2023, but we continue to expect an extended period of zero interest-rate policy beyond that as it may take economic conditions never before seen to kick start the next rate hike cycle.


The Fed meeting this week came and went with no major changes to policy, little in the way of new details with respect to the Fed’s recently announced two percent average inflation targeting regime, or even much in the way of forward guidance. All of which was largely expected by markets as policymakers had been vocal in recent weeks about the lack of need to do more in way of policy stimulus at this juncture.

The star of the show was the Fed’s first update to its economic projections since June amidst an economic recovery that has already progressed at a faster clip than policymakers had expected just three months ago, and which now include economic and interest rate forecasts through 2023.

Of particular note was the faster pace expected for the labor market recovery. The Fed estimated year-end unemployment of 9.3 percent following the June meeting, but policymakers now project 7.6 percent; it currently stands at 8.4 percent as of the August payrolls report.

How long could it take for the labor market to return to pre-pandemic levels? The Fed sees the unemployment rate returning to four percent by the end of 2023, just below the 4.1 percent rate the Fed estimates to be “full employment.” On the inflation front, policymakers expect sub-two percent for the next couple of years, rising gradually to two percent by 2023. And with maximum employment and two percent inflation expected to be achieved by 2023, the Fed’s subsequent rate forecast for 2023 is … zero percent.


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