The Fed has moved to keep rates on hold for three years, but now faces a rocky road to its goal of 2 per cent inflation.
The Fed opted to keep rates on hold at close to zero per cent and expects they’ll remain there until the end of 2023, though four officials pencilled in at least one rate hike through 2023. The Fed also expects to maintain its current rate of US$120 billion of asset purchases a month.
“Economic activity and employment have picked up in recent months but remain well below their levels at the beginning of the year,” the Fed said.
“Weaker demand and significantly lower oil prices are holding down consumer price inflation. Overall financial conditions have improved in recent months, in part reflecting policy measures to support the economy and the flow of credit to US households and businesses.”
But the Federal Reserve now “faces a conundrum” in its quest to get inflation to 2 per cent due to the disinflationary influences of technological innovation and demographic trends in population and aging – forces that BlackRock’s Rick Rieder, chief investment officer for global fixed income, believes will have a greater impact on the inflation rate than central bank policy.
“In the period ahead the Fed will face two choices, as it could either: 1) keep monetary policy easy for years in hopes of hitting its elusive 2 per cent inflation target, while risking a bubble in financial conditions as equities outpace the economy and depressed bond yields feed overzealous risk-taking, or 2) it can seek to normalise policy alongside eventual labor market healing,” said Mr Rieder.
“We think that once growth and employment momentum show enough progress, tying policy to an inflation goal that may never be sustainably reached could result in unnecessary stimulus policies that last for far too long.”
But Mr Rieder also questioned whether the Fed’s goal was worthwhile with millions of Americans out of work.
“For most lower- and middle-income households, inflation for inflation’s sake is a drag on net disposable income and more to the point on quality of life,” Mr Rieder said.
“It is a regressive tax on spending power.”