By David DiMolfetta
In its March 16 and 17 meeting minutes, the Federal Open Market Committee (FOMC) said that the economy is continuing its recovery amid the ongoing COVID-19 pandemic but that further progress is necessary before interest rate policy can change.
The news does not come as a surprise as Federal Reserve Chairman Jerome Powell has repeatedly said the Fed will continue to hold overnight interest rates near zero until the economy reaches full employment and necessary inflationary conditions. Such benchmarks are not expected to be met this year.
The FOMC is continuing to increase its holdings of U.S. Treasury securities by at least $80 billion and mortgage-backed securities by at least $40 billion. FOMC officials said in the minutes that such purchases “were providing substantial support to the economy.” The Fed’s quantitative easing efforts have been in full throttle since last March when global coronavirus lockdowns began onsetting.
The FOMC also raised its outlook for economic growth and inflation, with its outlook for GDP in 2021 at 6.5%, a substantial uptick from the 4.2% expectation in December. They also indicated that unemployment might fall to 4.5% by the end of 2021, and inflation could jump to 2.2%, slightly above the Fed’s 2% target.
In his March press conference, Powell said inflation needs to be “on track to exceed 2% moderately for some time” for the central bank to begin lifting interest rates again. The ambiguity has left market players wondering if the Fed may enact new policy sooner than planned amid an optimistic rise in several key areas of the economy, including labor market conditions.
In testimony to the Senate Banking Committee in March, Powell stressed that the economy’s improving performance – ranging from upticks in retail sales, home sales, household savings, and a drop in unemployment rates – has come from “extraordinarily low levels” and that he would be concerned only if economic conditions were to tighten.
Inflation and inflation figures were mentioned over 60 times in the March minutes, but FOMC officials said there was little cause for concern.
“The staff viewed the risks of upside inflationary pressures as having increased since the previous forecast and now saw the risks to the inflation projection as balanced,” they said.
In previous meetings and conferences, Powell did not worryingly opine on inflation conditions to reporters or lawmakers. In his Feb. 24 testimony to the House Financial Services Committee, he said that “inflation dynamics do change over time” but that they “don’t change on a dime.”
During a meeting with the media a few hours before the minutes were released, Chicago Fed President Charles Evans said it would take “months and months” of higher inflation “before I’m even going to have an opinion on whether this is sustainable or not,” CNBC reported on April 7.
According to Deutsche Bank, “The current gap between the market and the Fed is mostly about forecast disagreement. In particular, survey respondents expect that core PCE in the 2.2%-2.3% range in 2022 and 2023 will beget a more hawkish Fed response,” Deutsche Bank economist Matthew Luzzetti wrote in a note.
The PCE (Personal consumption expenditures price index) is a major measure of inflation in the U.S., capturing inflation across a wide range of areas based on consumer purchasing behavior.
ING Economics analysts wrote in a March 19 note that “a more meaningful change in the Fed’s language” would manifest during the FOMC’s June meeting, predicting that a new view of economic forecasts will present itself as Covid recovery further advances.
