The Federal Open Market Committee (FOMC) refrained from making any major policy changes at its meeting yesterday. However, the Committee upgraded its assessment of the current state of the economy. Specifically, the FOMC now looks for stronger GDP growth, higher inflation and lower unemployment in 2021 than it did three months ago.
The Committee decided to maintain its target range for the FED Funds Rate between 0.00% and 0.25% and to keep the FED's monthly purchase rate for Treasury securities and mortgage-backed securities unchanged respectively at $80 billion and $40 billion.
The Federal Reserve will continue to purchase securities at “at least” these rates "until substantial further progress has been made towards the Committee's maximum employment and price stability goals".
The Committee's optimistic outlook for the economy was reflected in its quarterly Summary of Economic Projections (SEP).
The median GDP forecast among the 18 committee members for 2021 rose to 6.5% in the current SEP from 4.2% in the last SEP in December. The forecast for 2022 edged up to 3.3% from 3.2% previously.
The upward revision to GDP growth led to a downward revision in the unemployment rate. Specifically, the median projection now shows the unemployment rate ending 2021 at 4.5%. This forecast had been 5.0% in December.
Inflation, as measured by the year-over-year change in the PCE deflator, is forecast to end the current year at 2.4%, up from the 1.8% rate that was forecast in December.
The updated economic outlook led a few committee members to bring forward their expected timing of rate hikes. The dot plot released now shows that four of the 18 members believe that a rate hike would be appropriate next year. Seven members think that rates will be higher in 2023, up from five members in December.
The majority of FOMC members still believe that it would be appropriate to keep rates on hold through at least the end of 2022, and 2023. The dot plot could drift higher in coming quarters if incoming data lead committee members to upgrade their forecasts for 2022.
The USD was sold off after the FED left all policy settings unchanged and maintained its outcome-based guidance, lifted its growth, unemployment and inflation forecasts (as expected), while the median ‘dot’ remained unchanged through 2023, implying the Fed is to remain accommodative for as long as required to meet its objectives; the Fed chair reiterated that it was too early to talk about tapering asset purchases.
(Source from DailyFX)
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