Amid forecast shift, Fed's Powell flags uncertainty over longer-run outlook

investing.com:

By Michael S. Derby

WASHINGTON (Reuters) — Federal Reserve officials on Wednesday nudged up the level estimated for their target interest rate over the longer term, but central bank Chair Jerome Powell said that does not necessarily herald an era of consistently higher interest rates.

Alongside maintaining the current target rate at 5.25%-5.50% and still penciling in three-quarters-of-a-percentage point of rate cuts this year, officials also raised their longer-run estimate of the fed funds rate to 2.6% from 2.5% in December's forecasts. That breaks above an estimate that had been in place for most of the last five years.

Policymakers' longer-run estimate had fallen persistently over the years prior to the pandemic in what proved to be an extended stretch of very low interest rates and persistently weak inflation.

But gradually, at least over the last year, views have been shifting. Seven policymakers now figure the long-run neutral rate is at least 2.9%, new projections released on Wednesday showed, versus just three a year ago.

Powell, at a press conference after the rate meeting, said that while he does not anticipate a return to very low rates he was not yet sure that a new higher-rate regime was in the offing.

“My instinct would be that rates will not go back down to the very low levels” that prevailed before the onset of the coronavirus pandemic in the spring of 2020, Powell said. But there’s “tremendous uncertainty” about where the longer-term rate will ultimately stand.

Over recent months, in the Fed and among private sector economists, there’s been an active debate over whether the pre-pandemic era of very low rates has run its course. Some believe that period's stretch of very affordable borrowing costs will