The December FOMC meeting contained little news. However, Chair Powell sent a clear indication that tapering is “premature” for the time being and that the bar to adjust the monetary policy is higher. The Fed left all measures unchanged at the meeting. The Fed funds rate stays at 0-0.25% and the size of asset purchases at US$120B per month.
On economic developments, the members acknowledged that “the pace of the recovery in economic activity and employment has moderated in recent months”. This compares with the description in December that “economic activity and employment have continued to recover but remain well below their levels at the beginning of the year”. Yet, they also noted that the “weakness [is] concentrated in the sectors most adversely affected by the pandemic”. As such, the recovery outlook “significantly” depends on the progress on vaccinations. The central bank continued to warn that “the ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook”.
The rest of the policy statement was the same the December one. On the forward guidance, the Fed reiterated that the policy rate will stay at the current rate “until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time”. On the QE program, the Fed also reiterated that the current pace of purchases will be maintained until “substantial further progress has been made toward the Committee’s maximum employment and price stability goals”.
On the monetary policy outlook, Chair Powell at the press conference indicated that policymakers will consider employment data for individual demographic groups as it pursues a “broad and inclusive” interpretation of its maximum employment mandate. Specifically, h suggested that consideration will be made on “demographic groups including women, minorities, etc”. The Fed will not indicated that whether the economy has reached maximum employment—which is our statutory goal—until we’ve reached maximum employment”.
Concerning expectations of tapering, Chair Powell suggested at the press conference that “it’s just too early to be talking about dates” of tapering and “the whole focus on exit is premature”. Echoing the message in the December minutes, the FOMC has pledged that communication about tapering will be “well in advance” and that it will be a “pretty gradual taper”. We expect the earliest time for tapering will be 2022, followed by the first rate hike in late-2023.