As expected, the Federal Open Market Committee (FOMC) left the target range for the federal funds rate unchanged at the effective lower bound range of 0.0% to 0.25%. The statement also committed to increasing its bond buying programs “at least at the current pace” for the foreseeable future.
As in April, the statement noted the severe near-term impact of the crisis and the potential for medium-term economic damage.
Consistent with this, the accompanying Summary of Economic Projections showed sharp contractions in economic activity and steep increases in unemployment:
- The median forecast for real GDP in 2020 was a decline of 6.5% (fourth quarter to fourth quarter), rebounding by 5% in 2021 and 3.5% in 2022. The long-term outlook for real GDP edged down by a tenth of a percentage point to 1.8%.
- The median unemployment rate is expected to hit 9.5% by the final quarter of 2020, improving to 6.5% by the end of 2021 and 5.5% by the end of 2022. The long-term outlook was unchanged at 4.1%.
- Inflation measures were revised down considerably, with the headline PCE measure at just 0.8% in 2020, rising to 1.6% in 2021 and 1.7% in 2022. Core PCE is similar, at 1.0% in 2020, 1.5% in 2021 and 1.7% in 2022.
The Fed’s dot plot for the future path of the federal funds rate is anchored to the zero-lower bound through 2022. Only two members saw a higher rate by the end of 2022, with one dot just above 0.25% and the other just above 1%.
Key Implications
No big surprises here, despite the unsurprisingly dour views of FOMC participants on the economic outlook. Other parts of the statement were relatively unchanged, with the exception of the commitment to increase purchases by at least their current rate, indicating a bias to do more rather than less.
The Fed also noted the improvement in financial conditions, in no small part due to the considerable policy supports provided by the Federal Reserve and Congress. Still, it is an extremely uncertain outlook, and the Fed may have to reach further into its policy toolkit in the future in order to support the recovery. We would not be surprised to see them beef up their forward guidance to include reference to inflation returning convincingly to target and perhaps even making up for lost ground.
