When Will Interest Rates Rise? Fed Chair Says ‘No Time Soon’

Jerome H. Powell, chair of the Federal Reserve, said the central bank remained far from dialing back support for the economy.

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Jerome H. Powell, the chair of the Federal Reserve, said the U.S. economy is a long way from recovery and the central bank would not raise interest rates anytime soon.CreditCredit...Pool photo by Greg Nash
Jeanna Smialek

With the incoming Biden administration pushing for more economic stimulus and with multiple coronavirus vaccines already approved, some investors have been wondering whether the Federal Reserve might soon start to ease off its support for the economy.

Jerome H. Powell, the central bank’s chair, made it clear on Thursday that the central bank would be cautious in doing so — and that action was anything but imminent. During a webcast question-and-answer session, Mr. Powell said it would take time for the economy to recover from the pain of the pandemic era.

“When the time comes to raise interest rates, we will certainly do that,” he said. “And that time, by the way, is no time soon.”

Currently, dire short-term conditions — surging virus deaths, high unemployment, and partial state and local economic lockdowns — contrast sharply with the longer-term outlook. Economists think that the economy might come roaring back later in 2021 as vaccines allow normal life to resume and consumers spend money they saved during the pandemic.

That split has led some investors to worry that the Fed might speed up its plans to reduce the pace of its enormous bond purchases, or even to lift interest rates from the near-zero setting that has been in place since March. The central bank has been buying about $120 billion in Treasury and mortgage-backed debt per month to keep markets operating smoothly and to help goose the economy.

“We’ll let the world know” when it’s time to discuss plans for slowing purchases, Mr. Powell said, and that will happen only when it’s clear that they are well on their way toward their economic goals.

“We’ll do so, by the way, well in advance of active consideration of beginning a gradual taper in asset purchases,” he added.

Other top Fed officials, including Lael Brainard, who is a board governor, and Vice Chair Richard Clarida, had also struck a cautious tone when talking about the outlook for both economic growth and monetary policy in recent days. But their remarks had contrasted with more impatient ones from some of the Fed’s 12 regional bank presidents, a fact that had caught investor attention. Mr. Powell’s appearance put to rest any suggestion that the central bank is planning to hasten its return to a more normal policy setting.

Mr. Powell and his colleagues must thread a needle. In 2013, markets gyrated wildly as the Fed made its initial moves away from huge bond purchases, in what became popularly known as the “taper tantrum.” Now, officials hope to offer investors plenty of information about what they are planning — to avoid spooking them — without signaling that a reduction in economic support is right around the corner.

“They’re committed to ensuring that there is not another taper tantrum,” said Subadra Rajappa, head of U.S. rates strategy at Société Générale. The goal in reinforcing low rates and a steady course for asset purchases, she added, is “to talk down the market.”

Fed officials and private forecasters are projecting a strong pickup in economic activity once vaccines become widely available. They have also acknowledged that inflation is likely to move higher in 2021, because of short-term technical factors, and that a short-lived spike in price increase would not necessarily worry Fed policymakers.

Mary C. Daly, president of the Federal Reserve Bank of San Francisco, said in a Bloomberg television interview earlier on Thursday that temporary jumps in inflation would not necessarily signal that tepid price gains — the problem of the modern economic era — were a thing of the past.

“It’s quite possible that we’ll see some spikes above 2 percent. In fact, the math of inflation would suggest that we’ll get some spikes in the middle of the year,” she said. “That’s not a victory on price stability.”

Mr. Powell also acknowledged that inflation could increase temporarily, but said the bounce would be “very unlikely” to lead to persistently faster gains. If inflation does pick up substantially, the Fed knows how to use policy to counteract that.

“Too-low inflation is the much more difficult problem to solve,” he said.

He reiterated that the Fed, which has made a habit of lifting interest rates to prevent overheating in the labor market, would no longer do that — instead allowing the job market to continue to tighten so long as excesses do not appear.

“We saw the social benefits that a strong labor market can and did bring,” Mr. Powell said, referring to the last business cycle, in which unemployment dropped to 3.5 percent but wage and price increases remained tame. “One of the big lessons of the last crisis was how much room there was in labor force participation.”

And he said he believed that the economy could return to its pre-crisis levels.

“I’m optimistic about the economy over the next couple of years, I really am,” Mr. Powell said. “We’ve got to get through this very difficult period this winter, with the spread of Covid.”