Economic Flash

Fed Keeps Policy Unchanged, Sees Growth and Inflation Boosts as Transitory


by Craig Dismuke, Dudley Carter

Fed Keeps Policy Unchanged, Sees Growth and Inflation Boosts as Transitory

As expected, the FOMC unanimously voted to keep its policy rates unchanged, but made several adjustments to their forward projections.  The language in the Official Statement was changed minimally, replacing the assessment of moderating economic activity with an acknowledgment that future indicators have improved.  The asset purchase Implementation Note stated that the Fed will discontinue purchases of CMBS going forward, “in light of the sustained smooth functioning of markets for agency commercial mortgage-backed securities.”

Summary of Economic Projections

Since their December 16 meeting, $2.7 trillion of additional stimulus has been approved, a significantly larger amount than expected at the time.  Moreover, the pandemic was nearing its worst point with no evidence of relief.  Today, cases have continued to run lower and state and local governments are increasingly reopening.  The Fed’s SEP economic projections reflect the additional stimulus with the economy now expected to expand 6.5% this year versus 4.2% as of their December projections.  The unemployment rate is also expected to decline more rapidly, ending 2021 at 4.5% versus a projection of 5.0% in December.  Given the stronger growth and recent firming of some commodity prices, PCE inflation is now expected to average 2.4% this year while core inflation is expected to average 2.2%.  However, with the exception of the labor market, these stimulus impacts are expected to be temporary.  Growth in 2022 was revised up just 0.1% to 3.3% while growth in 2023 is now projected to be 0.2% lower at 2.2%.  Longer-run growth is still expected to be 1.8%.  Headline and core PCE inflation are both expected to pull back to 2.0% in 2022.  In contrast to the transitory impact on growth and inflation, the unemployment rate is expected to continue to decline, falling below the revised-lower-4.0% NAIRU rate by next year. The unemployment rate is expected to end 2022 at 3.9% and 2023 at 3.5%.  Despite the projected strength of the labor market, officials continue to project inflation to remain near 2.0%, averaging 2.1% in 2023.

Dot Plot

Against the backdrop of better growth, near-target inflation, and a tighter labor market; Fed officials continue to project no rate increases through 2023.  However, the dots migrated slightly higher in both 2022 and 2023.  Four participants now believe it will be appropriate to hike rates in 2022, up from one as of the December projections.  Seven participants, up from five, now believe it will be appropriate to hike before the end of 2023 by an average of two hikes.  Nonetheless, even with a stronger backdrop, eleven participants continue to project no rate hikes over the next three years.

Bottom Line

While the overall outcome of today’s policy decision remains dovish, it will only take three more participants to move their 2023 dots higher to move the median outlook to a rate hike.  If the pandemic continues its positive trend over the summer, it appears such a shift could occur as early as the Fed’s June 16 Meeting.


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Official Statement

March 17, 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.

The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Following a moderation in the pace of the recovery, indicators of economic activity and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak. Inflation continues to run below 2 percent. 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, including progress on vaccinations. The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook.

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; 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.




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