Economic Flash

Fed Holds on Policy Changes, Will Continue QE Until They Make “Substantial Improvement” in Achieving Goals


by Craig Dismuke, Dudley Carter

Fed Holds on Policy Changes, Will Continue QE Until They Make “Substantial Improvement” in Achieving Goals

Policy Decision: The FOMC voted to keep its target overnight rate range unchanged at 0.00-0.25%, indicated it would continue to expand its portfolio at a pace of $120 billion per month, provided vague qualitative forward guidance, raised their economic projections, and maintained their collective view that rates will remain unchanged over the forecast horizon. They also announced the extension of their U.S. Dollar liquidity swap lines and the repo facility for foreign and international monetary authorities through September 2021.

Addition of Vague Forward Guidance: The Official Statement was modified minimally to include “qualitative outcome-based guidance.”  The Statement no longer says that the Fed will grow their portfolio holdings “over coming months,” but now states that they will do so “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”  The new forward guidance adds very little insight but replaces the temporary description of the asset purchases.  Rather than stating that they will grow their portfolio holdings “at the current pace,” the Implementation Note was modified to specify that they will purchase $80 billion Treasuries and $40 billion MBS securities each month.

Economic Outlook Revised Higher: The Summary of Economic Projections reflects an improved economic outlook.  The economy is now expected to contract only 2.4% in 2020, up from an expected 3.7% contraction in the September SEP.  It is expected to expand 4.2% in 2021 and 3.2% in 2022, up from 4.0% and 3.0% respectively.  However, the longer run growth rate was dropped from 1.9% to 1.8%.  The labor market is now expected to recover more quickly.  The unemployment rate is now projected to end 2019 at 6.7%, down from 7.6% in September’s projections.  It is now expected to end 2021 at 5.0% and 2022 at 4.2%, down from 5.5% and 4.6% respectively.  Despite the positive revisions, inflation is expected to remain below-target through 2023. The Summary of Economic Projections now include a new set of fan charts showing the distribution of participants’ economic forecasts.

Rate Outlook Unchanged: Despite the improved economic outlook, the Dot Plot shows only minor changes in the overnight interest rate outlook.  The majority of participants expect the target rate to remain anchored at zero through the end of 2023.  There continues to be only one participant who expects to raise rates by year-end 2022 and that person now only expects a 25 bps increase (down from a 50 bps increase).  There are now five participants who expect to hike by year-end 2023 but twelve who expect rates to remain at zero.  The most hawkish participant lowered their year-end 2023 forecast from 1.375% to 1.125%.  As for the longer run outlook, a net of two participants lowered their projections, but the median longer-run rate remained at 2.50%.

Bottom Line: There was some speculation that the recent increase in virus cases, slowing of the recovery, and weakness in consumer inflation would lead the Fed to tweak their asset purchase program to provide additional accommodation.  However, the doves may be satisfied by the Fed’s refusal to project future rate increases despite the improved economic outlook.  The addition of qualitative outcome-based guidance gives us very little insight today, but may prove more insightful as the recovery progresses.



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Federal Reserve Official Statement

December 16, 2020

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.

The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Economic activity and employment have continued to recover but remain well below their levels at the beginning of the year. Weaker demand and earlier declines in oil prices have been holding down consumer price inflation. 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. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running 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; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles.

Implementation Note issued December 16, 2020


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