Fed Won't Raise Rates Until Inflation 'On Track To Moderately Exceed 2% For Some Time'

In a move that was widely expected, the U.S. Federal Reserve maintained its current fed funds target range of zero to 0.25% on Wednesday following a disappointing August retail sales report.

“The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects 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 said in a statement.

Why It's Important: This week's Fed meeting was the first since Chairman Jerome Powell discussed the Fed’s new “average inflation targeting” policy in late August in which it may keep interest rates near 0% until inflation levels exceed its 2% inflation target.

The Federal Reserve also released new “dot plot” economic forecasts. Thirteen Fed members see no change to interest rates through at least 2023. Two members forecast rates will rise by 0.25%, one member forecasts a 0.5% rise and one member forecasts a 1.25% rise by 2023.

The committee is projecting a 3.7% decline in U.S. GDP in 2020 but a return to 4% growth in 2021 and 3.0% growth in 2022.

Markets React: The Federal Reserve issued two emergency interest rate cuts totaling 1.5% in March in response to the COVID-19 outbreak and has provided access to more than $2.3 trillion in loans to support the economy.

On Wednesday, the Fed said it plans to continue buying Treasury bonds mortgage-backed securities “at least at the current pace” to promote smoothly functioning financial markets.

The SPDR S&P 500 ETF Trust (NYSE: SPY) traded higher by 0.4% on Wednesday after the report.

The yield on 10-year U.S. Treasury bonds declined slightly to 0.677%, down 0.002% on the day.

Related Links:

Why The Federal Reserve's New Approach To Inflation Makes Sense

Investors Cheer Powell's New 'Average Inflation Targeting' Policy