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17/03 FOMC: Summarised & Explained

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".

Summary of Economic Projections:

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.

FED Chair Powell Highlights:

(Source from DailyFX)

  • The Fed is strongly committed to using its full range of tools to support the economy for as long as it takes; Will be patiently accommodative until our job is done
  • Stronger economic outlook follows progress made with the covid vaccine rollout and latest fiscal stimulus bill; US unemployment rate remains elevated while labour force participation is still below pre-pandemic levels
  • Fiscal stimulus will help us avoid economic scarring overall and also expedite the return to full employment 
  • The majority of the FOMC is not showing a rate increase during the forecast period through 2023
  • Not yet time to start talking about tapering, we are patiently waiting for ‘actual’ further substantial progress toward goals; Will give as much advance notice as possible before tapering monetary policy
  • Don’t want to focus on the timing of the next possible rate hike; Benchmark rates were at 0.00% for seven years without financial excesses in the wake of the last crisis
  • We want to get inflation moderately above 2.0% for some time; Inflation will move up over the next few months but one-time price increases will have a transient impact overall
  • Asset purchases are currently appropriate across the yield curve 
  • Asset values by some measures are elevated; Household and business debt levels do not appear to be troubling
  • An announcement on supplementary leverage ratios (SLRs) will be made in the coming days; Decision on any restrictions on bank capital distributions remains a couple of weeks away
  • Very strong US demand will ultimately support global activity over time; notes US and Europe are seeing divergent recoveries

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