There were no surprises in the FOMC’s June policy statement, and all the interesting information was either in the new set of Summary of Economic Projections or in Chairman Powell’s post-meeting press conference. What seemed to get the most attention in the press and by commentators was the supposedly more hawkish stance of policy as evidenced by a move up in the median federal funds rate for 2023.
Now, 2023 is a long way off, and a lot can happen in the economy and with inflation between now and then. But more interesting than the increase in the median federal funds rate, which stood at 0.6%, is the wide range of views on appropriate policy in 2023, as reflected in the dot plot. Interestingly, seven participants saw no rate hikes in 2023; two saw only one rate move; three saw only two moves; three saw three moves; three saw four moves; and two saw a total of six moves, assuming such moves were in 25-basis-point increments. The reason the median rate was as high as 0.6% for 2023 is that a minority of the participants saw more than two rate hikes in 2023, thus pushing the median much higher than a majority (12) of the committee participants would support. Of course, we don’t know which responses were those of voting members of the FOMC (a roster which changes each year); and voting members’ views are most critical in determining the outcomes.
There are other interesting tidbits of information buried in the SEP that raise questions about the projections and their consistency. First, most of the changes in the projections are confined to 2021. GDP was marked up from 6.5% to 7%, and unemployment was unchanged, but PCE inflation was increased from 2.4% to 3.4%, and core PCE inflation was bumped up from 2.2% to 3%. This change implies that the participants saw growth and an acceleration in inflation but no significant progress on the employment front. Second, while we heard anecdotal evidence of increases in energy and food costs, the recent slight pullback in food and gasoline prices suggests that most of the increase in prices was viewed by the participants as lying outside food and energy, since 0.8 percentage points of the 1-percentage-point increase in PCE was not due to food and energy per se. Indeed, Powell suggested during the press conference that the increase of 0.6 percentage points in PCE was due to car shortages and associated price increases. Third, there was a substantial pullback in the GDP growth projection in 2022 from 2021, from 7% to 3.3%, which is still above estimates of potential; but there was no change as far as the SEP is concerned between March and June estimates. In the June estimates, growth slows even more, back to about 2.4% in 2023. Unemployment declines in 2022, evidencing further improvement in labor markets, but declines only slightly more to 3.5% in 2023, again with no change between March and June. Finally, inflation – both PCE and core PCE – declines by over 1 percentage point in 2022 and increases only slightly above target in 2023. Finally, the slowdown in growth and inflation takes place through 2023, with no change in the federal funds rate target in 2021 and 2022; yet the Committee projected a series of rate hikes in 2023. It is hard to see what could be happening in the minds of the Committee or in the data it confronts to trigger rate hikes, other than a desire to begin to restore policy to a more normal stance. The slowdown in both growth and inflation seen in 2022 would be consistent with the view previously articulated that some of the price hikes seen in 2021 were the results of demand and supply mismatches and supply chain disruptions that will ultimately be cured.
Turning to the press conference, an overriding theme that occurred was uncertainty – uncertainty concerning the path of the virus, uncertainty about the pace of vaccinations, uncertainty about the path of economic recovery, uncertainty about employment, and uncertainty about inflation, just to name a few. Powell was clear when discussing the recovery: the economy remains far from exhibiting the substantial progress that he and the FOMC require in the jobs situation in order to justify a policy change. Furthermore, when the picture improves, as reflected in the 2023 rate assumptions, substantial accommodation would remain in place.
When questioned about tapering increases in the Fed’s portfolio, Powell declined to indicate any timetable. He said the recent meeting was the one where the Committee was merely “talking about talking about” portfolio changes, and that perhaps the phrase should be retired. He also indicated that the Fed would provide ample advance warning about any portfolio changes. Left to speculation was whether tapering would begin before a rate change, whether realignment of the portfolio would be completed before a rate change, or whether some combination of the two might be appropriate. Finally, because of how strongly Powell touted the new policy framework and the guidance it provided to markets, it was surprising to hear him say, in response to a question, that the average inflation target was not formulaic but subjective, and he admitted that the approach was more like “flexible inflation targeting.”
So, it appears, for now, that policy tightening is still far off; and it isn’t at all clear that all the attention by the press and markets is justified at this point. We are in a period of watchful waiting with lots of uncertainty yet to be resolved.
Robert Eisenbeis, Ph.D.
Vice Chairman & Chief Monetary Economist
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