In a landmark meeting of the Federal Open Markets Committee (FOMC), the US Federal Reserve announced that low interest rates are likely to prevail until at least 2023. Until then, Fed policy rates are expected to remain in the 0.0%-0.25% range (median at 0.1%) together with a consistent pace of Treasury purchases and mortgage-backed securities at US$80 billion ($108.9 billion) and US$40 billion respectively. 

“The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2% for some time so that inflation averages 2 percent over time,” announced the committee. Rates are likely to remain low until these targets are achieved even if the Covid-19 pandemic recedes before then. 

Such aggressive monetary policy is unlikely to have any inflationary effects considering the weakened state of the global economy and greater uncertainty on the horizon. FOMC noted that weaker demand as well as lower oil prices are presently holding down consumer price inflation. Despite a slight upward revision in inflation projections, headline and core PCE will likely reach 2% only in 2023. 

FOMC offered a more cheerful prognosis on the US economy for this year, with the economy expected to contract by 3.7% (down from 6.5% previously) while unemployment will end the year at 7.6% vis-a-vis the previous projection of 9.3%. But growth in 2021 is expected to come in lower at 4% (down from 5%) and to 3% in 2022 (down from 3.5%). Unemployment will, however, ease to 5.5% (down from 6.5%) in 2021 and to 4.6% in 2022 from 5.5% previously. 

“The Fed’s long run projections for growth edged higher to 1.9% (previous forecast: 1.8%) while unemployment rate was unchanged at 4.1%, which continues to suggest the Fed does not see the pandemic causing permanent damage to the US economy for now,” says UOB Senior Economist Alvin Liew, who expects the road to recovery to stretch beyond 2022 and low interest rates till 2023. OCBC Chief Economist Mansoor Mohi-uddin sees low rates persisting till as late as 2025. 

But DBS’s Eugene Leow and Phillip Wee, a rate and an FX strategist respectively, believe that a monetary policy taper could come as early as 2021. With the Fed having announced that taper could take place should unemployment fall below 8% in 2013, the  projected fall in unemployment to 5.5% in 2021 and 4.6% in 2022 could see the Fed easing off monetary easing. 

“Further curve steepening is likely over the coming quarters as the global economic recovery gathers steam,” they write in a broker’s report on 17 September. “While a vaccine(s) could do the trick, we reckon that better treatment methods would also allow the current pandemic crisis to transit into a more conventional economic crisis,” they continue. 

The Bank of Japan is likely to emulate the Fed’s upgraded economic assessment and unchanged policy in light of new Prime Minister Yoshihide Suga’s planned third stimulus package and snap polls likely in 4Q2020. The Bank of England may pursue policy easing in November as well, with the UK’s consumer price index falling below 1% y-o-y in August amid growing risks of a no-deal Brexit following London’s illegal Internal Market Bill. 

The Fed’s reassurances have been good for the US Dollar Index (DXY), which has returned above 93 on the FOMC Meeting with an upside bias. Yet, the S&P 500 and the Nasdaq fell 0.5% and 1.3% respectively. US 10-year treasury yields began to approach 0.70% based on FOMC’s stronger projections for the US economy.