In its last meeting before the November elections, the Federal Reserve announced that it will maintain a target interest rate at or near zero percent until the economy recovers from the coronavirus pandemic, likely through 2023.
“It will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time,” the Fed announced in a statement Wednesday.
The Fed announced last month that it would temporarily allow inflation to run above its target to make up for periods of below-target inflation.
For now, the Fed’s biggest task is ensuring as strong a recovery from the pandemic shutdowns as possible.
The unemployment rate plunged to 8.4% in August, down from 14.7% in April. The drop in the jobless rate was faster than expected, as some anticipated the rate being above 10% through at least the end of the year.
However, the dwindling prospect that Congress will enact another relief bill has created worry that consumer demand could decline.
Retail sales increased just 0.6% in August, and July’s number was revised down from 1.2% to 0.9%, the U.S. Census Bureau reported Wednesday.
Retail sales had previously been rebounding quickly after collapsing a record 14.7% in April and 8.3% in March because of the economic shutdown in an attempt to slow the spread of the coronavirus.
A likely contributor to the slowdown in sales growth was the fact that several states continue to struggle to keep their economies open as they are forced to close businesses to slow the spread of the virus.
Another factor is the expiration of the $600 enhanced unemployment payments at the end of July. Without those payments, jobless workers receive roughly two-thirds less in benefits, making it hard to purchase items.
Congress in March enacted legislation that provided relief to businesses and jobless workers. Much of that assistance has expired, and consumer demand could continue to suffer if another plan does not pass. Prospects for further aid are dim at the moment.
Two officials dissented from Wednesday’s decision. Federal Reserve Bank of Dallas president Robert Kaplan voted against the decision because he sought to retain more flexibility in setting interest rates. Federal Reserve Bank of Minneapolis president Neel Kashkari dissented on the grounds that the committee should have committed to zero interest rates until inflation hit 2% as gauged by “core” inflation, a measure that strips out food and energy prices and is less volatile than overall inflation.
The Fed’s monetary policy committee meeting that finished Tuesday was the central bank’s first since overhauling its approach to controlling inflation.
By keeping interest rates low and allowing more flexibility with inflation, the Fed is taking a broader view of its mandate to pursue “maximum employment,” hoping for lower unemployment and underemployment as long as inflation doesn’t result.
The Fed targets an annual rate of inflation for the U.S. economy to help boost consumer demand, which increases production. This situation usually results in hiring because companies need more workers to meet the jump in demand.
“Many find it counterintuitive that the Fed would want to push up inflation,” Fed Chairman Jerome Powell said in an August speech discussing the policy change. “However, inflation that is persistently too low can pose serious risks to the economy.”
