Update expects economic recovery to gain momentum, to 6.5% in 2021
The Federal Reserve as expected maintained its easy-money policies and vowed to maintain them until the U.S. economy recovers further from the effects of the coronavirus pandemic, while also highlighting a more robust U.S. economy — 6.5% in 2021.
“Following a moderation in the pace of the recovery, indicators of economic activity and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak,” the Fed said in a statement (link) released Wednesday after the conclusion of the two-day Federal Open Market Committee (FOMC) policy meeting.
Short-term interest rates near zero will hold through 2023, according to most of the 18 Fed officials at the confab, according to updated economic projections (link). But seven now expect to start lifting rates in 2022 or 2023, up from five in December.
The Fed will continue buying at least $120 billion per month of Treasury debt and mortgage-backed securities until “substantial further progress” is made toward those objectives.
Key Fed update takeaways: Stronger economic growth (6.5% in 2021, up from December’s 4.2%), higher inflation (Personal Consumption Expenditures (PCE) inflation of 2.4% this year, up from 1.8% in December) and lower unemployment this year (4.5%) than projected in December (6.2%). Officials expect Core PCE inflation to slow to 2% in 2022 and 2.1% in 2023, reflecting expectations of a transitory rise in inflation. In December, Fed officials did not expect either inflation reading to reach 2% until 2023. Officials haven’t said exactly how high or how long they would allow inflation to run above 2%.
Fed Chairman Jerome Powell hailed the fiscal response from Congress providing “the fastest and largest response to any post-war economic downturn.” He said the improved economic results being seen and were the result of “unprecedented fiscal and monetary policy actions” and that the recovery has taken place “more quickly than generally expected.” But the efforts to combat the pandemic via an expanding vaccination effort, Powell said, “offer hope to a return to more normal conditions later this year.”
Powell was asked if it was now time to “start talking about talking about tapering?” Powell chuckled and said, “Not yet.” He proceeded to outline largely what he has said previously that the Fed still wants to see “substantial progress” toward the Fed’s goal of maximum employment and their 2% inflation goal. He then matter-of-factly said, “We will be carefully looking ahead. We also understand that we will want to provide as much advance notice of any potential taper as possible. So, when we see that we are on track, when we see actual data coming in that suggests that we are on track to perhaps achieve substantial further progress, then we'll say so. And we'll say so well in advance of any decision to actually taper.” Of note, there will be some additional monetary policy announcements coming, as Powell said, “in coming days” relative to a question on the supplemental leverage ratio.
As for inflation, the Fed is still wanting to actually see inflation or other data points be realized as opposed to mere forecasts of what the Fed wants to see. “Talking about inflation is one thing,” he commented. “Actually having inflation run above 2% is the real thing.” He added that over the years, “we've talked about 2% inflation as a goal, but we haven't achieved it.” He also reiterated the Fed wants to see inflation running “moderately” above 2% for “some time.” But he added “I don't want to be too specific about what that means because I think it's hard to do that. And we haven't done it yet. You know, when we are actually above 2%, we can do that.”
As for “substantial progress” outlines for either inflation or fully employment, Powell again would not be drawn into trying to provide a clear definition of what the term “substantial” means. “So, what I am saying is to achieve substantial progress from where we are, having had three months of very little progress, is going to take some time,” he said relative to U.S. jobs growth. “And we don't want to get into — I don't want to get into trying to put a pin on the calendar someplace because it's going to be data dependent. When we see ourselves on track to make substantial further progress, we are going to say so.”
As for bond yields, Powell again showed he will not be drawn commenting on matters that could produce a market surprise, in this case, bond yields that have been climbing. He chalked up recent market action to “highly accommodative” monetary policy, something which is “appropriate.” He then said he ”would be concerned by disorderly conditions in markets or by a persistent tightening of financial conditions that threaten the achievement of our goals. We think the stance of monetary policy remains appropriate. Our guidance on the Federal funds rate and on asset purchases is providing strong support for the economy, and we are committed to maintaining that patiently accommodative stance until the job and well and truly done.”
Reaction: ING Economics says “the forecasts point to a more positive outlook while we believe that there is a better growth and employment story that will lead to an earlier QE taper and a summer 2023 rate hike. Some other analysts think the Fed will overplay their hand and the U.S. economy will grow even faster than they currently project.