US Fed official says no urgency to update guidance on rates

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There’s no urgency for the U.S. Federal Reserve to offer more guidance on how long it will hold short-term interest rates near zero as market participants understand the central bank won’t raise rates any time soon, a senior Fed official has said.

“Market expectations are that rates will be low for a long period of time, and so I don’t feel like there’s a burning pressure that we need to change our forward guidance today to change market expectations,” Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said in an interview with the Bloomberg Odd Lots podcast published Monday.

“I think the committee’s already done a good job setting expectations,” Kashkari said, referring to the Fed’s policy-making committee.

The Fed in July kept its benchmark interest rate unchanged at the record-low level of near zero while warning that a recent resurgence in COVID-19 cases nationwide started to weigh on economic recovery.

“I think the work will come and my guess is that we will adopt some more formal form of state-contingent forward guidance, but the committee just hasn’t gotten to that conclusion yet. But I think, I suspect that we’ll get there,” he said.

More than a year ago, Kashkari had proposed that the Fed adopt a forward guidance tied to inflation outcomes, saying that the central bank will not raise rates until core inflation gets back to 2 percent on a sustained basis.

“I think forward guidance that is anchored to an outcome of actually achieving our inflation target would be a big step forward relative to where we are today,” he said.

Kashkari’s remarks came as Fed Chairman Jerome Powell announced on Thursday that the central bank will seek to achieve inflation that averages 2 percent over time, a new policy strategy that will likely keep interest rates near zero for years.

Some analysts expected the Fed to update its forward guidance on interest rates, possibly linked to inflation or unemployment outcomes, at its next policy meeting in September.

“With prospects that it will take years to significantly reduce the currently high joblessness, this also suggests that the Fed will keep rates low for a long time,” Mark Zandi, chief economist of Moody’s Analytics, wrote Sunday in an analysis.

“In our forecast, the economy doesn’t return to full employment until late 2023, which suggests that accurate short-term rates will be near zero for another three years,” Zandi wrote.

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