On its first statement following the publication of updated long-run goals and strategy, the Federal Reserve made explicit its desire to make up for past inflation underperformance, stating that “the Committee will aim to achieve inflation moderately above 2 percent for some time.”

The statement’s characterization of economic conditions was largely unchanged, recognizing the recent improvement, but also the continued weight on recovery and ongoing downside risks posed by the health crisis.

The FOMC also restated their commitment to maintaining asset purchases “at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions.”

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Updated economic projections saw real GDP and inflation lifted, the unemployment rate marked down, and monetary policy at the effective lower bound through 2023.

  • The median projection for real GDP is now expected to decline by 3.7% in 2020 (fourth quarter to fourth quarter), up from 6.5% in June. GDP is expected to rebound in 2021, but growth was marked down to 4%, from 5% in June. It was also revised lower in 2022 to 3.0% from 3.5%. The Committee expects the economy to still exceed its long-run potential in 2023, growing by 2.5% before settling at its longer run rate of 1.9%.
  • The projection for the unemployment rate in the final quarter of 2020 was brought down to 7.6% (from 9.3% in June), to 5.5% (from 6.5%) in 2021, and to 4.6% (from 5.5%) in 2022. The rate is expected to hit 4.0% in 2023, which is marginally above the committees median projection for the longer run rate (4.1%).
  • Both headline and core PCE inflation were raised throughout the forecast horizon. PCE inflation to 1.2% (from 0.8%) in 2020 and 1.7% (from 1.6%) in 2021, while core was lifted to 1.5% (from 1.0%) in 2020, to 1.7% (from 1.5%) in 2021). Both core and headline were expected to average 1.8% (up from 1.7%) in 2022, finally hitting 2.0% in 2023. Despite the Fed’s stated target to achieve inflation above 2%, few members expect it to actually do so.
  • Finally, as in June, the median estimate for the future fed funds rate held at 0.1% through 2022 and remained there with the addition of 2023 to the table. Only one FOMC member expected a rate hike before the end of 2022, and only one sees the fed funds rate above 1% by 2023.

Two FOMC members – Robert S. Kaplan and Neel Kashkari –  dissented from the decision. Kaplan wanted the FOMC to maintain flexibility, while Kashkari wanted a more firm commitment to leave policy at the current rate until inflation has reached 2% on a sustained basis.


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