Prior to the Fed’s December FOMC meeting there was a general consensus among economists (see the December NABE forecast, for example) that the Committee would not change its federal funds rate target.
But the media was filled with speculation that the FOMC would possibly increase its asset purchase program or begin to purchase longer-maturity Treasuries. At least one writer argued, however, that the FOMC would not make any changes in policy; and aside from the rearrangement of a couple of sentences in the Committee statement, that is exactly what happened
Foremost on the FOMC members’ minds, as evidenced by both the statement and in Chairman Powell’s opening statement at the press conference was the pandemic and its impacts upon the economy. Partly as a consequence of developments on the vaccine front, the Committee’s outlook, as revealed in its new Summary of Economic Projections (SEP), showed less decline in 2020 real GDP (from -3.7% to -2.4%) and slightly stronger GDP growth in 2021(from 4.0% to 4.2%) in 2021 and a .2 percentage point increase for 2022. Similarly, the Committee saw nearly a half percentage point improvement in unemployment for 2021 from 5.5% to 5%, and further declines in 2023 and 2024. There was little change in the Committee’s PCE inflation projection which continued below its 2% target through 2022.
More interesting was Chairman Powell’s press conference for three reasons. First, he emphasized that the FOMC had a new policy framework consisting of an accommodating monetary policy using asset purchases and target range for the federal funds rate, an average 2% inflation target with a stable 2% market inflation expectation, and forward guidance. The forward guidance stated that policy would be accommodative until labor market conditions reached levels consistent with the Committee’s estimate of maximum employment and inflation had reached 2% and was on track to moderately exceed 2% for some time. And one was left at this time with the impression – supported by the SEPs – that it would be well into 2022 before one might expect any adjustments in policy. Against this background, the first question of the press conference asked by Bloomberg’s Rich Miller focused on recent improvements in real GDP, employment and inflation asked whether that would meet the definition of the kind of progress envisioned by the Committee. Powell responded by declining to provide specific numbers and instead he re-read the statement and argued essentially that when that time came they would know it and telegraph so in advance. In other words, the question exposed that the so-called framework was just a hollow shell lacking specificity. There was no hint about what the trigger points might be for policy changes nor was there any indication of what terms mean like “moderately exceed” or how long was “for some time.”
Miller followed up with a second question on whether the Fed should now consider purchasing longer term assets to increase the duration of its portfolio. Again, the Chairman talked around the issue citing what the Fed statement said about asset purchases, which had nothing to do with the maturity structure of those purchases. Later in the press conference in response to a similar question, he stated that in fact there was no consideration at this time of purchasing longer term assets.
Other questions touched upon issues like whether equity prices were too high relative to bond prices and Powell in responding focused on the fact that as of yet those markets did not pose a significant threat to financial stability. Interestingly, no one asked questions about how big the Fed’s balance sheet should be or how it might address the issues surrounding balance sheet normalization.
What was also striking that Powell seemed less confident in his answers and appeared to be somewhat ill at ease when faced with tough questions about the policy framework and how it might work in practice. This highlights the fact that the FOMC has major communication issues concerning what it will do, what the key measure of full employment is and when it will determine the appropriate time to change policy.
Subsequent to the FOMC meeting, Congress agreed to certain limitations on the Federal Reserves’ ability to extend several emergency lending programs that had been put in place under the CARES Act passed earlier this year. The new legislation, rescinds about $429 billion in unused CARES Act lending facilities by the end of December. In addition, it prohibits the programs from being either restarted or duplicated without approval from the Congress. The language in the Act, however, is not intended to limit other existing or potential programs put in place by the Federal Reserve under its emergency lending powers contained in Section 13 (3) of the Federal Reserve Act as modified by the Dodd-Frank Bill in 2010. Of course a new Congress can modify these restrictions and it remains to be seen what the new Administration may propose or how Janet Yellen will interact with the Federal Reserve when it comes to emergency lending.
Robert Eisenbeis, Ph.D.
Vice Chairman & Chief Monetary Economist
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