To no one’s surprise, the FOMC kept its target range for the federal funds rate at 0–.25% and reaffirmed that it will continue adding to its portfolio at the rate of $120 billion per month, in a mix of at least $80 billion in US Treasuries and $40 billion in agency MBS. The Committee’s statement began by noting that the pandemic was causing untold economic hardship across the country and that the pace of the recovery had slowed. Indeed, subsequent data released by the Bureau of Economic Analysis showed in the fourth quarter and GDP growth for the year was -3.5% for the year, the worst since 1946.
The Committee also continued its outcomes-based forward guidance, confirming that with a slowing economy and continuing unemployment, it would maintain the current stance of policy until the economy reached what it viewed as full employment and inflation was on track to be moderately above 2% for some time.
The press conference following the meeting was relatively short, and the questions asked were more related to potential financial stability concerns and labor market inequalities than to the policy stance. Chairman Powell was asked about the possibilities of bubbles in housing and asset prices of non-bank-related financial markets, whether the low interest rates were the cause, and whether policy might be adjusted or additional tools employed to address those issues. In each case, he responded that the Committee and staff follow developments in financial markets broadly and that what they are observing at present in markets is more in a response to fiscal policy and progress in addressing the coronavirus than it is to low interest rates, and he didn’t at this point see issues of major concern.
As for how long rates would be kept at present levels and asset purchases would continue, Powell stressed that the economy was far from achieving the Committee’s statutory goals and recovery would likely take some time. He placed particular emphasis on the negative impacts that the pandemic had on minorities and implied that full employment would not be realized until the inequities had been solved. This answer suggests that policy accommodation is likely to be in place at least most, if not all, of this year and into next year as well. Some commentators have noted that 10-year and 5-year breakeven inflation expectations have edged up slightly to 2.18% and 2.08% respectively as of January 27. Those movements can be interpreted as market confirmation of the Committee’s hopes that inflation will move up and remain slightly above 2% for some time. But movements in expectations have not yet been confirmed by movements in actual inflation, and the Committee expects those movements to be some time off yet.
Finally, Powell did give great emphasis to the fact that both the recovery and policy depend critically upon progress in addressing the pandemic, which is the major uncertainty facing the economy at this point. But for now, and into the foreseeable future, it is “steady as she goes.”
Robert Eisenbeis, Ph.D.
Vice Chairman & Chief Monetary Economist
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