FOMC Minutes Show Cautious Optimism

May 20 21, 02:51 GMT

The minutes from the April 27-28 Federal Open Market Committee (FOMC) meeting continued a trend where members recognized the improvement in recent economic data, but were cautious on the risks to the recovery.
The members of the Committee noted the “encouraging developments regarding the pandemic, including significant declines in the number of new cases, hospitalizations, and deaths over the intermeeting period as well as a pickup in the pace of vaccinations.”
Even with these positive developments, the members exuded caution, stating that “the pandemic continued to pose considerable risks to the economic outlook, including risks associated with new more-contagious virus strains, obstacles in getting sufficient numbers of the public vaccinated, or social-distancing fatigue.”

Key Implications

This meeting comes on the heels of the Fed’s significant economic upgrade in March. Since then, the economic data have continued to point to an economy that is rapidly healing and poised to close in on its economic potential later this year.
Though the economy is moving in the right direction, we aren’t out of the woods yet. Fed Vice Chair Richard Clarida stated the same when he said, “we’re still a long way from our goals, and in our new framework, we want to see actual progress and not just forecast progress.” He is effectively stating that the progress has been welcomed, but the Fed will wait for actual economic data to confirm that it has achieved its mandate before it hikes its policy rate.
On Quantitative Easing (QE), the fact that Fed Vice Chair Clarida and others are stating the economy is ‘a long way’ from recovered means that they also aren’t ready to adjust the pace of asset purchases.
Though the Fed isn’t adjusting policy based on economic forecasts, investors should be prepared that by the end of this year, the economy will have made significant progress on meeting the Fed’s objectives. And by the middle of next year, those objectives will likely be met. This should open the door for an adjustment to QE policy by the end of this year and a rate hike by the end of next year.