The Federal Reserve Open Market Committee (FOMC) maintained the current stance of monetary, which includes keeping the federal funds rate at the current 0% to 0.25% range.
The statement also maintained the commitment to purchase at least $80 billion Treasuries and $40 billion agency mortgage-back securities per month.
The Fed remains committed to using “its full range of tools to support the U.S. economy in this challenging time.”
The accompanying Summary of Economic Projections was upgraded substantially from December:
- The median projection for real GDP growth was upgraded to 6.5% (from 4.2%) in 2021 and to 3.3% (from 3.2%) in 2022. The forecast for 2023 ticked down to 2.2% from 2.4% while the expectation for growth over the longer run was unchanged at 1.8%.
- The median unemployment rate forecast fell to 4.5% (from 5.0%) in 2021, to 3.9% (from 4.2%) in 2022, and to 3.5% (from 3.7%) in 2023. The median longer-run estimate for the unemployment rate dropped to 4.0% (from 4.1%).
- On inflation, the median estimate for core PCE rose to 2.2% in 2021, 2.0% in 2022, and 2.1% in 2023.
- The median projection for the fed funds rate remained at the lower bound through 2023. The long-run neutral rate was unchanged at 2.5%.
- All of the members of the FOMC voted in favor of the decision.
Key Implications
The upgrade to the FOMC’s growth projections reflect the positive improvement in recent economic data and the expectation that vaccine deployment, combined with the Biden fiscal stimulus, will push growth even higher over the coming months. Please see our recent report for the details behind the U.S. economic growth upgrade.
The rise in the inflation outlook is a consequence of the improved growth narrative. With the Fed now looking for inflation to overshoot the 2% target before it hikes interest rates (see the AIT framework here), the upgrade to the core PCE profile to 2.1% in 2023 was significant, as is signals the potential for an earlier than expected rate hiking cycle.
The Fed dot plot confirmed some of this rate hike speculation. Though the median dot has no hikes through 2023, there are now four members that see rate hikes starting in 2022 and three more members seeing policy rates lifting off the floor in 2023. That is a total of seven members seeing higher policy rates by the end of 2023. Though U.S. Treasury yields rose on the news, market participants have been repricing Fed expectations for the last nine months. The UST 10-year now sits at 1.66%, 1.15 percentage points higher than it was in August. That is a big move and not too far off the 1.3 percentage point rise in the 10-year yield during the Taper Tantrum (May to September 2013). Though yields have risen considerably, we could see yields continue to move higher as the economic recovery becomes even more entrenched.
