Cue the printing presses. It may be a low-interest rate environment for years to come.
That is if the Federal Reserve has anything to do with it.
On Wednesday, the Federal Open Market Policy Committee concluded its two-day policy meeting promising to hold interest rates steady–near zero–and said it will continue its bond-buying purchases this year. This, despite the Fed anticipating stronger growth and inflation in 2021.
The market traded higher immediately on the news, with the Dow soaring 152 points to 32,977 though the S&P 500 and Nasdaq hugged the flatline.
The prognosis means the market party should go on.
Lower Rates Through 2023
Most officials expect to hold rates near zero through 2023 even as they anticipate a stronger economic recovery.
“Following a moderation in the pace of the recovery, indicators of economic activity and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak,” said the Fed in a statement at the conclusion of its meeting.
According to updated projections, most of the 18 Fed officials expect to hold short-term interest rates near zero for the next couple of years. Just seven of the policy makers said they might anticipate lifting rates in 2022 or 2023…that’s up from five policy makers anticipated rate hikes in 2022 or 2023 at the December meeting.
Meanwhile, the Fed will continue is bond-buying program at at least $120 billion per month for Treasuries and mortgage-backed securities. This has the effect of helping keep rates on treasuries low…and, it anticipates continuing its action until “substantial further progress” is made.
Higher GDP, Lower Unemployment, and Some Inflation
Officials anticipate higher growth this year, with Gross Domestic Product rising to 6.5% in 2021. At the December meeting, they anticipated 4.2% GDP growth.
In addition, policy makers expect the federal unemployment rates to fall to 4.5% from 6.2% by the end of this year.
Inflation is expected to rise 2.4%, the Fed projects. This would be higher than 1.8% they projected in December but nonetheless, they have repeatedly expressed a tolerance to higher inflation.
The Market Loves An Active and Supportive Fed
Bottomline: this is the support the market so desires. But, the Fed is walking a tightrope. Historically, most bubbles have been inadvertently creating via an over-active Federal Reserve. Let’s hope that’s not the case this time.