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Chief economist update: Zero beyond 2023

The US Federal Reserve's new monetary policy framework - lower interest rates for longer or average inflation targeting - (virtually) announced at the August 27 Jackson Hole Symposium is now live.

The Fed kept policy settings unchanged at its 15-16 September FOMC meeting - the first since "the Hole" - and promised "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% and is on track to moderately exceed 2% for some time".

Based on the September dot plot, the Fed funds rate would be zero (nought point 25% to be exact) till the year 2023, supported by the latest "economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, that show PCE price inflation reaching the inflation target of 2% three years from now.

The Fed's latest forecasts show GDP growth contracting by less this year (-3.7% versus -6.5% projected in June) but at the expense of a slower pick up in the following years - 4% versus 5% in 2021 and 3% from 3.5% in 2022 before expanding by 2.5% in 2023. The Fed also upgraded its unemployment rate predictions to 7.6% this year (from 9.3% forecast in June), 5.5% (from 6.5%) next year, and 4.6% (from 5.5%) in 2022 and 4% in 2023.

A seamless and positive narrative if I may say so.

Then again, cast your eyes on the years before the COVID-19 pandemic, when America's unemployment rate hit a near 50-year low of 3.5%. That failed to lift the headline and core PCE price indices - the Fed's inflation target - above 2%, did it not?

Even assuming that chairman Powell and his merry FOMC men are on the ball that inflation would hit the 2% target by 2023, the US central bank's new "average inflation targeting strategy" puts average 2020 to 2023 inflation only at 1.7%.

Yes, Virginia, the Fed funds rate could remain at near zero beyond 2023.

More so, when overlayed with the uncertainty of the forecasts themselves for as the Fed notes: "The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term".

Added to this is the uncertainty over the upcoming US elections, the on-going Sino-US trade war and geopolitical tensions, among others.

To quote Nils Bohr - Nobel laureate in physics - "Prediction is very difficult, especially if it's about the future".

Read our full COVID-19 news coverage and analysis here.

Read more: FOMCUS Federal ReserveChairman Powell
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