It was not a surprise that the FOMC last week kept its 0–.25% target range for its federal funds target and maintained its asset purchase program consisting of $80 billion in Treasuries and $40 billion in agency securities. Accompanying the Committee’s statement was a new set of Summary Economic Projections (SEPs).
Most notable was the change in median GDP growth for 2021, which was marked up from 4.2% in December to 6.5%. There were no significant changes to the 2022 number, which was increased from 3.2% to 3.3%, and the 2023 number was decreased from 2.4% to 2.2%. The median unemployment rate for 2021 was decreased from 5% to 4.5% and decreased 0.3 percentage points for 2022 and 0.2 percentage points for 2023. (It is notable that the 2021 GDP growth rate and unemployment rate are substantially different from Goldman Sachs’ more optimistic projections of 8% for GDP and 4% for unemployment (https://www.axios.com/goldman-sachs-us-economy-grow-8-per-cent-2021-eb7e1d84-b6fa-483a-9e19-37a7faddadc0.html). Finally, the Committee’s median projection for PCE inflation was revised up to 2.4% for 2021 and was essentially unchanged for 2022 and 2023. At the press conference, Chairman Powell made it clear that the 2.4% number is viewed as transitory due to onetime potential price increases driven by a surge in demand relative to available supplies and by potential supply chain bottlenecks, and is not likely to persist, as reflected in lower numbers for 2022 and 2023.
What got most of the attention at the press conference were the dot plots for the target federal funds rate. No Committee participant foresaw a rate move in 2021; only four saw the possibility of a rate hike in 2022; and seven saw a rate hike in 2023. Chairman Powell downplayed questions of whether the changes signaled a possible rate hike coming sooner than was projected in December. He stated that the majority of the Committee was committed to rates remaining accommodative and that 2022 and 2023 are far enough away that drawing any meaningful inference about the timing of a policy move is not yet possible.
There were two notable features of this most recent press conference. First, Powell repeatedly touted the Committee’s revised Longer-Run Goals and Monetary Policy Strategy and its outcomes-based objectives as a significant step towards transparency. In particular, he noted that rates will remain accommodative until the data show that maximum employment has been achieved, that average PCE inflation is “slightly” above its 2% target for “some time,” and that inflation expectations are well anchored. When pressed, however, Powell refused to provide any specific measures of employment that are indicative of full employment, and he provided no guidance as to how big “slightly” is or how long “some time” is. We were left with the conclusion that the so-called outcomes-based guidance is vague and lacks specificity. It could be summed up as “the Committee will know it when it sees it.”
The second part of the discussion that stood out occurred when CNBC’s Steve Liesman asked Chairman Powell whether there was concern about recent movements in longer-term interest rates and whether those moves might frustrate the Committee’s ability to achieve its growth and employment objectives. (Note that at the close of day on Wednesday, after the FOMC meeting, the 10-year rate was at 1.63%, and it was up to 1.74% at close of business last Friday.) More specifically, Liesman asked whether there was any consideration of intervening in a twist effort to impact rates along the curve. Instead of answering what appeared to be a legitimate question, Powell bluntly asserted that the Committee viewed current policy as appropriate. When pressed by Liesman, Powell repeated his previous response.
Barring unforeseen events, we are left with the view that we should expect the FOMC’s policy rate to remain unchanged and that the FOMC will be data-driven. Markets are either overreacting to potential policy moves at this time and/or may be somewhat more optimistic about growth and potential inflation than the FOMC is. Right now, as Powell asserted, the path for the economy is critically dependent upon the virus, which is a major uncertainty. Even small changes could alter our view. For example, on March 1, the Atlanta Fed’s GDP Now forecast was for 10% growth. Subsequent data releases resulted in a markdown to 8.4% on March 8, to 5.9% on March 16, and to 5.7% on March 17. And these markdowns occurred before the most recently released data on new claims for unemployment insurance, which rose to 770,000 for the week of March 13. These markdowns in response to incoming data suggest that considerable uncertainty exists at the moment as to the path of the economy.
Robert Eisenbeis, Ph.D.
Vice Chairman & Chief Monetary Economist
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