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Federal Reserve Holds Rates Steady, Suggests No Hikes Until At Least 2024

The Fed's so-called dot plots suggest interest rates will remain at near zero percent for at least the end of 2023 as the economy slowly recovers from its coronavirus-triggered recession.

The Federal Reserve kept its key policy rate unchanged Wednesday and said it would keep interest rates near zero for at least the next three years, a much longer period than analysts' had expected. 

In the Fed's final policy meeting before the November Presidential election, the central bank noted that both economic growth and employment have improved in recent weeks, but remain well below levels seen at the beginning of the year. The Fed also said it would purchase additional assets, such as government and corporate bonds, in order to support its monetary stance and the broader economy.

"The Committee seeks to achieve a maximum employment and inflation rate of 2% over the longer term," the Fed said in its official statement. "With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2% for some time so that inflation averages 2% over time and longer-term inflation expectations remain well anchored at 2%."

"The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved," the statement added, noting that rates will stay in the range of between 0% and 0.25% until at least the end of 2023, or "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."

U.S. stocks extended gains following the Fed statement and the early portion of Powell's press conference, but gave back some of those moves heading into the final hour of trading, with the Dow Jones Industrial Average paring to a 105 point advance and the broader S&P 500 trading 6.8 points, or 0.2% lower, on the session.

The Fed said it expects the economy to contract by around 3.7%, compared to its June assessment of a 6.5% slump triggered by the coronavirus pandemic. Unemployment, the Fed's projections indicate, will likely sit around 7.6% by the end of the year, compared to the prior projection of 9.3%.

"The Fed essentially acknowledged they were a bit behind the curve with their forecast on the economy, as projections needed tweaking to reflect the current path of the recovery," said Charlie Ripley, senior investment strategist for Allianz Investment Management. "However, with near-term risks to the outlook still intact, the Fed continues to reiterate that it is too early for victory laps on the economic recovery."

"On the horizon, the path of the virus, the upcoming election, and the motivation for additional fiscal stimulus are all hurdles the economy needs to overcome," he added.

The new Fed statement is also the first under a new strategy of 'inflation targeting' unveiled by Chairman Jerome Powell late last month.

Under the new focus, the Fed will tolerate a period of faster inflation, or a rate that rises past its preferred 2% target, in order to deliver more broad-based gains in the labor market.

"The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Economic activity and employment have picked up in recent months but remain well below their levels at the beginning of the year," the Fed said. "Weaker demand and significantly lower oil prices are holding down consumer price inflation."

"The path of the economy will depend significantly on the course of the virus," the statement added. "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."