The Federal Reserve Open Market Committee (FOMC) maintained the current stance of monetary policy, which includes keeping the federal funds rate at the current 0% to 0.25% range. The statement also maintained the commitment to purchase at least $80 billion in Treasuries and $40 billion in agency mortgage-back securities per month.
The Fed’s statement on economic conditions noted that “with progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have improved in recent months, but the rise in COVID-19 cases has slowed their recovery.”
The statement altered its language on future asset purchases, moving well past the “talking about talking” stage by saying, “the Committee judges that a moderation in the pace of asset purchases may soon be warranted”
The accompanying Summary of Economic Projections downgraded the near-term economic outlook and raised expectations for inflation:
- The median projection for real GDP growth was downgraded to 5.9% (from 7%) in 2021 and upgraded to 3.8% (from 3.3%) in 2022. The forecast for 2023 ticked up to 2.5% from 2.4%, while the expectation for growth over the longer run was unchanged at 1.8%.
- The median unemployment rate forecast was raised to 4.8% (from 4.5%) in 2021, unchanged at 3.8% in 2022, and unchanged at 3.5% in 2023. The median longer-run estimate for the unemployment rate remained at 4.0%.
- On inflation, the median estimate for core PCE rose to 3.7% in 2021 (from 3.0%) , 2.3% in 2022 (from 2.1%), 2.2% in 2023 (from 2.1%), and 2.1% in 2024.
- The median projection for the fed funds rate at the end of each calendar year was raised to 0.3% in 2022 (from 0.1%), to 1.0% in 2023 (from 0.6%). A rate of 1.8% is now expected for 2024 (new forecast). The long-run neutral rate was unchanged at 2.5%.
All of the members of the FOMC voted in favor of the decision.
Heading into today’s meeting, expectations were for the Fed to give further guidance on when it will taper its Quantitative Easing (QE) purchases. It hinted at it, but gave no firm direction, opting to say that a taper “may soon be warranted.” Look for lots of questions being hurled at Chair Powell during the post-meeting presser. During the Jackson Hole Symposium in August, Chair Powell gave forward guidance that a tapering could happen by “year-end”. Though a more precise announcement today was on the table, November is now most likely.
In addition to a decision on QE, Fed watchers were also looking to see if FOMC officials changed their outlook in light of recent Delta-driven economic weakness. Based on today’s release, Fed officials are clearly looking past recent weakness. They have simply moved more of it into next year and have GDP growth continuing to run at an above trend clip through 2024. They see the unemployment rate dropping below the long-run level in 2022 and have inflation staying above 2% for the next three years.
Markets were little changed on today’s announcement. The US10Y yield is down slightly and is still hovering around 1.3%. The U.S. dollar index is flat at 93 and equity markets have held on to earlier gains. Though markets have maintained calm today, the fundamental drivers for high yields remain in place. There exists a severe underpricing of the Fed’s future policy path and the compensation investors are receiving for inflation risk is insufficient. A rebound in economic data once we are past this Delta hurdle may be the impetus that markets need to deliver a repricing. Please see our updated forecast here.