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Fed Expects Interest Rates To Remain Near Zero Through 2022

eccles building 112818 10jun20 lt

While the Federal Reserve expects the U.S. economy to rebound in 2021 following a sharp contraction this year due to the coronavirus pandemic, the central bank has indicated interest rates are likely to remain at current near-zero levels through 2022.

The Fed on Wednesday announced its widely expected decision to maintain the target range for the federal funds rate at zero to 0.25 percent.

The accompanying statement also reiterated that the Fed expects to maintain this target 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.

The economic projections provided along with the statement showed most Fed officials expect rates to remain at current levels through 2022, with only a couple predicting an increase in rates.

In his post-meeting press conference, Fed Chair Jerome Powell said the central bank is "not even thinking about thinking about raising rates."

Powell also told reporters that it "remains an open question" whether targeting interest rates along the yield curve would usefully complement the Fed's main tools.

Expectations that rates will remain at record lows come as the Fed projects real GDP to nosedive by 6.5 percent in 2020, as the ongoing public health crisis weighs heavily on economic activity.

However, the Fed's projections call for real GDP to rebound by 5.0 percent in 2021 followed by a 3.5 percent jump in 2022.

The unemployment rate is expected to drop to 9.3 percent by the end of this year from the current 13.3 percent before pulling back further to 6.5 percent in 2021 and 5.5 percent the next year.

Regarding the Fed's asset purchase program, the central bank said it plans to increase its bond holdings at least at the current pace over the coming months but noted it remains prepared to adjust its plans as appropriate.

The Fed's statement was little changed from April but did acknowledge financial conditions have improved, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

In April, the Fed had said, "The disruptions to economic activity here and abroad have significantly affected financial conditions and have impaired the flow of credit to U.S. households and businesses."

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