Fed could hold rates at zero for 5+ years - Bloomberg

(Updated - August 26, 2020 9:32 AM EDT)

The Fed is likely to hold its short-term interest rate near zero for at least five years. A group of analysts, who talked to Bloomberg, expect the adoption of a new strategy for implementing monetary policy by the Federal Reserve. The new model could be adopted as early as next month.

“I wouldn’t be surprised if interest rates are still zero five years from now,” said Jason Furman, a former chief White House economist and now Harvard University professor. His view is also shared by David Wilcox, a former Fed official.

“I’d be very surprised if it’s less than three years. I could see it being as much as six or seven years if the damage from the crisis proves to be much more long lasting,” he said.

The Fed may adopt a more relaxing approach towards inflation as it would welcome a temporary rise above their 2% target.

“We’re not even thinking about thinking about raising rates,” Powell said following the June meeting. All 17 policy makers at the Federal Reserve expect to see federal funds rate near zero this year and next.

“It’s perfectly conceivable it could take seven years,” before rates are increased, said former U.S. central bank official Roberto Perli.

Another change may come to the Fed's view on the full employment and labor market in general. While the Fed may be more relaxed on inflation, the focus on achieving a strong labor market may be higher than in the past.

“They’re not going to act to cool off the labor market unless it’s generating unwanted inflation,” said Nomura Chief U.S. Economist Lewis Alexander. “That’s essentially walking away from the concept that there is a natural rate that it is irresponsible to push beyond.”

Fed Chairman Jerome Powell is set to update the Fed's 1-1/2-year-old framework review of its policies and practices when he speaks from Jackson Hole on Thursday.

You May Also Be Interested In

• Senate votes to halt Iran war unless Trump gets approval from Congress
• Trump on Iran: we're trying to work out a deal that's fair
• Warsh: Appointing Task Force In Five Areas Of Monetary Policy