The U.S. Federal Open Market Committee, the Federal Reserve’s policy-setting panel, gets its broad marching orders from Congress. Its dual mandate is to steer the U.S. economy to both price stability and maximum sustainable employment. How the Fed uses its discretion in achieving these goals, as well as in defining them, is at the heart of its policy decisions—and it’s why Vanguard believes the Fed is unlikely to raise rates in the near term.
The Fed has outlined changes to its monetary policy framework that give us confidence that it won’t raise its benchmark federal funds rate target until at least 2023, even as stimulus payments flow through the economy and stock markets remain near record highs. On Wednesday, March 17, the Fed reaffirmed that it would keep monetary policy accommodative for the foreseeable future to support economic recovery from the COVID-19 pandemic. It said it would keep its rate target near zero and continue to increase its holdings of Treasury securities and agency mortgage-backed securities by a total of at least $120 billion per month for now.
In this Q&A, Vanguard economists Andrew Patterson and Adam Schickling discuss the conditions driving the Fed’s decision-making, including its 2020 move to an average inflation target and Chairman Jerome Powell’s view that maximum sustainable employment means people in historically hard-to-reach pockets of the labor market getting back to work.