EconoFACTS

March 17, 2021 | 14:49

FOMC Policy Announcement and SEP — Holding Firm

Economist

Deputy Chief Economist, Head of U.S. Economics and Managing Director
Economics

Michael Gregory is Deputy Chief Economist and Head of U.S. Economics for BMO Capital Markets. He manages the tea... (Read more)

Michael Gregory , CFA

Deputy Chief Economist, Head of U.S. Economics and Managing Director
Economics

Michael Gregory is Deputy Chief Economist and Head of U.S. Economics for BMO Capital Markets. He manages the tea... (Read more)

Fed’s outlook brighter but no policy budge

In the FOMC’s policy statement there were no changes to the fed funds target range or the pace of asset purchases, nor the forward guidance on either front, as expected. The 0%-to-0.25% range will be maintained “until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time”. Monthly purchases of at least $80 billion Treasuries and $40 billion MBS will be maintained “until substantial further progress has been made toward the Committee's maximum employment and price stability goals". The statement mentioned that "economic activity and employment have turned up recently” but there were no other meaningful changes.

In the Summary of Economic Projections (SEP) the median forecasts for 2021 were upgraded significantly from where they stood three months ago (thanks to the Consolidated Appropriations Act and American Rescue Plan Act passed during the interim). Real GDP growth is now 6.5% vs. 4.2%, the jobless rate is 4.5% vs. 5.0%, along with total PCE inflation at 2.4% and core inflation at 2.2% vs. 1.8% for both before. On the growth front, the median projection for 2022 was revised up slightly but it was revised down a bit for 2023 -- mostly a wash. The jobless rate ends 2023 at 3.5% vs. 3.7% before with total and core inflation at 2.1% vs. 2.0% before.

The 2023 endpoint appears to be converging on the FOMC’s rate hike criteria but not in a convincing enough fashion to sway policymakers’ projections for the fed funds target. In the dot plot, only 7 of 18 participants penciled in at least one rate hike by the end of 2023 (vs. 5 of 17 before), with four in 2022 (vs. only one). It will take two more participants changing their no-move calls to turn the dial on the median rate forecast for 2023.

Bottom line: The FOMC likely has to see further progress towards it goals in the data on the ground before the vast majority of policymakers might be prepared to signal rate hikes in their projections.