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Fed pledges to keep interest rates near zero through 2023

Federal Reserve Chair Jerome H. Powell testifies before the House Financial Services Committee on Capitol Hill on June 30, 2020, in Washington, D.C. (Tasos Katopodis/Getty Images)

(CNN) — The Federal Reserve committed Wednesday to do more to help the US economic recovery, promising more asset purchases and lower interest rates for even longer than it previously expected.

The Federal funds rate remained unchanged at zero to a quarter percentage point, and will stay there until America’s labor market has recovered “consistent with the Committee’s assessments of maximum employment” and the inflation rate has risen to 2%, and is on track to exceed that level for some time.

Given the country is still down 11.5 million jobs since February and the consumer price inflation rate over the past 12 months stood at 1.3% last month, this seems like a long way off.

Claims for unemployment benefits have come down, but remain more than four times higher than the pre-pandemic level.

“That just tells you that the labor market has improved, but that it’s a long way from maximum employment,” Fed Chairman Jerome Powell told reporters during the press conference.

A survey of Fed officials showed the group expects rates to remain at or near zero through 2023 — a year later than the previous survey conducted in June.

It was the central bank’s first monetary policy update since announcing changes to its framework in July following an 18-month review. Under the new strategy, the Fed will favor maximizing employment over regulating spikes in inflation. It still targets 2% inflation, as it has for decades, but it won’t hike interest rates quite as quickly in the future to counteract inflation spikes.

On top of that, the central bank will buy more Treasury securities and mortgage-backed securities over the next several months to keep markets functioning and keep financial conditions smooth.

Powell also reiterated that there likely needed to be more fiscal stimulus.

The Fed did have some optimistic news to report: It updated its economic projections, and the picture seems to have improved. For example, the central bankers expect a median 7.6% unemployment rate for 2020, down from the 9.3% forecast in June. And projections for gross domestic product — the broadest measure of the economy — are now for a 3.7% decline for the year, a smaller contraction than the from 6.5% decline expected in June.

But the unemployment rate alone doesn’t necessarily reflect other issues in the economy, such as income inequality. While the Fed has limited tools to address these concerns, the central bank still pays close attention to it, Powell said in response to a question from CNN.

“The relative stagnation of incomes for people at the lower end of the income spectrum and also lower mobility … are things that hold back our economy. They are,” Powell said. Ultimately, he noted, “these are issues for elected representatives.”

While most members of the Federal Open Market Committee voted in favor of the decision, there were two dissenters: Dallas Fed President Robert Kaplan thinks the Fed should reconsider rates when its members are confident that the economy has weathered the storm and is on the path higher. Meanwhile, Minneapolis Fed President Neel Kashkari believes rates should remain at the current, low level until core inflation has reached 2% “on a sustained basis.”

Powell wasn’t concerned about the dissent. “There is no cookbook,” he told reporters, adding that some disagreement after changing the framework is both to be expected and desired.

At the end of the day, the economic recovery continues to depend on the course of the virus, the Fed statement said.

“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,” according to the statement.

— CNN Business’ Matt Egan contributed to this article.