Fed Assessment Reflects Transition Point
by Craig Dismuke, Dudley Carter
The FOMC voted unanimously to keep its policy rate range at 0.00-0.25% for the tenth consecutive meeting and indicated it would continue to purchase $80 billion Treasury and $40 billion MBS securities per month until “substantial further progress” has been made. The Fed has now grown its balance sheet 91% ($3.78 trillion) from its pre-pandemic level. As a technical matter, the Fed did vote to raise its interest rate on excess reserves from 0.10% to 0.15% as overnight rates have recently drifted downward from the mid-point of the Fed’s target range. They also determined to extend their Dollar liquidity swap lines with foreign central banks from September 30 to December 31.
While policy was essentially unchanged, the overall tone of the Fed’s publications marked a turning point. The assessment of the pandemic previously stated, “The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world.” The new Statement notes, “Progress on vaccinations has reduced the spread of COVID-19 in the United States.” It goes on to say, “Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy.” This appears to mark a transition in perception to seeing the pandemic’s largest impact being in the rear-view mirror. The Statement continues to note that “risks to the economic outlook remain.”
The assessment of the economy was unrevised despite the recent weakness in the pace of payroll recovery, reflecting the Fed’s belief that the weakness in job growth will be transitory. Moreover, the Summary of Economic Projections continues to show an unemployment rate of 4.5% at year-end and expectations for overall economic growth this year were revised up from 6.5% to 7.0%.
The description of inflation was tweaked from saying, “With inflation running persistently below” target to saying, “With inflation having run persistently below” target. This slight change also reflects a transition from being in a period of below-target inflation to that being in the past. Since the Fed’s April meeting, core PCE inflation has risen from 1.43% YoY to 3.06% on a variety of factors including recovering prices from the pandemic, supply chain disruptions, and broader based price increases. The Summary of Economic Projections now shows that Fed officials believe core PCE will increase 3.0% in 2021, up from 2.2% in the March SEP, while headline PCE will increase 3.4%, up from 2.4%.
The Fed’s dot plot further illustrates a transition in perception with officials now increasingly projecting rate increases in 2022 and 2023. As of the March SEP, only four officials believed it would be appropriate to hike rates in 2022 and seven believed it would be appropriate by year-end 2023. The median forecast for both years was that rates would remain unchanged at 0.00-0.25%. As of the May dots, seven officials now believe it will be appropriate to hike rates before the end of 2022 and thirteen officials believe it will be appropriate by the end of 2023. The median forecast for year-end 2023 was increased by 50 basis points to a range of 0.50%-0.75%. None of the longer-run dots were changed with the median longer-run forecast remaining at 2.50%.
Attention will now turn to Fed Chair Powell’s press conference and the presumed discussions about when tapering might be an appropriate topic of conversation.
Federal Reserve Official Statement
June 16, 2021
The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.
Progress on vaccinations has reduced the spread of COVID-19 in the United States. Amid this progress and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement. Inflation has risen, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.
The path of the economy will depend significantly on the course of the virus. Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Charles L. Evans; Randal K. Quarles; and Christopher J. Waller.