Fed keeps rate near zero and sees brighter economy in 2021

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The Hill

Federal Reserve Chairman Jerome Powell testifies before a House Financial Services Committee hearing on Capitol Hill in Washington, Wednesday, Dec. 2, 2020. (Greg Nash/Pool via AP)

WASHINGTON – The Federal Reserve said Wednesday that it will keep buying government bonds until the economy makes “substantial” progress, a step intended to reassure financial markets and keep long-term borrowing rates low indefinitely.

The Fed also reiterated after its latest policy meeting that it expects to keep its benchmark short-term interest rate near zero through at least 2023. The Fed has kept its key rate there since March, when it took a range of extraordinary steps to fight the pandemic recession by keeping credit flowing.

Chair Jerome Powell said he and other Fed officials expect the economy to rebound at a healthy pace next year as viral vaccines become widely distributed. But the next three to six months will likely be painful for the unemployed and small businesses as pandemic cases spike, Powell said at a news conference.

In a statement and in Powell's answers to reporters, the Fed signaled that it's prepared to keep rates ultra-low for the long run to help the economy withstand those threats and sustain a recovery. Yet Powell also pointedly stressed the need for further rescue aid from Congress to ease the impact of increased apartment evictions and business failures, and he expressed optimism about the deal under consideration by Congress.

“The case for fiscal policy right now is very, very strong," Powell said, “and I think that is widely understood now. It's a very positive thing that we may finally be getting that."

Congressional leaders appear to be nearing agreement on a $900 billion relief package that would provide extended unemployment benefits, more loans for small businesses and possibly another round of stimulus checks for individual Americans.

“Ongoing fiscal negotiations are more important than anything the Fed did today,” said Eric Winograd, U.S. economist at asset manager AllianceBernstein.

The Fed's policymakers made just one notable change to the statement they issue after each meeting. On Wednesday, they said the central bank will continue to buy at least $80 billion of Treasurys and $40 billion of mortgage-backed securities a month “until substantial further progress has been made” toward the Fed's goals of maximum employment and stable prices.