The FOMC did three things yesterday. It affirmed its current accommodative interest rate policy by keeping its target for the federal funds rate at 0%–.25%. It accelerated the decrease in its asset purchase program, which now, if the schedule holds, would end by March. Policy would still be extremely accommodative on both the interest rate and liquidity fronts, but further increases in liquidity would stop. Finally, it released a new Summary of Economic Projections (SEP), suggesting that there may now be as many as three rate hikes next year, as compared with the last SEP, which had only two moves in 2022.
The policy statement itself was uninformative aside from saying that there was no change in the funds rate target and affirming the deceleration in asset purchases. Otherwise, it consisted mostly of the Committee’s now-standard boilerplate, affirming its willingness to use all its tools and its commitment to full employment and stable prices and arguing that it will monitor developments and adjust policy accordingly.
Chair Powell’s press conference was interesting in several respects. The correspondents were on target, for example, asking for a more complete definition of what the Fed views as full employment and when it will be achieved. Powell repeated his oft-stated position that the FOMC looks at a wide range of factors, from the unemployment rate to the participation rate, quits and starts, job demand, and so on; but the bottom line was that the Committee would make the judgment when it deems that the data support it. As for questions about the nature of inflation, Powell elaborated on the factors at and after the November meeting that led him to conclude that it was time to start the pullback in the Fed’s asset purchase program. He cited the Employment Cost Index that became available right before the November meeting, which was up 1.3 percent for the three months ending in September. The Bureau of Labor Statistics jobs report, which was healthy, came two days after the November meeting. Then, a week later, the CPI report came out, showing that inflation was up 6.8 percent year-over-year. He stated that those three numbers suggested to him that it was time to further decrease the Fed’s asset purchases from what had been suggested in November, and the Committee started to work on what should be done.
As a few last points, we turn to the SEP and how it changed. First, with respect to median GDP growth, the Committee saw a slight decrease for 2021 from 5.9 percent to 5.5 percent, a slight increase in 2022 from 3.8 percent to 4 percent (noticeably slower than for 2021), and a further decrease in 2023 to 2.2 percent from 2.5 percent. Unemployment was forecast to decrease further in 2022 but then remain unchanged for 2023 at 3.5 percent, where it would be below the full employment estimate of 4 percent over the longer run. The really interesting projections were for PCE headline inflation. The Committee ratcheted up its forecast for year-end 2021 from 4.2 percent to 5.3 percent, an increase of a full 1.1 percentage points. However, by the end of 2022, inflation was seen as declining to 2.6 percent and further to 2.3 percent in 2023. But the Committee was silent, as was Powell in the press conference, as to what forces would account for such a decline. Was it simply a curing of the supply dislocations, or was it the consequences of a tighter monetary policy and a slowdown in growth? How could all that happen and the country still have an even stronger labor market? There are many questions here for the FOMC to consider as it contemplates further changes in policy going forward. And of course, the overriding uncertainty is the impact that a potential surge in COVID infections might have on the economy and on the implications for the policy path that the Committee sees itself on at this point. As Powell stated in his press conference, we will know more in three months and even more in six months. But for right now, the Committee is comfortable with its path, with the Dow Jones Index up 383.25 points by the close on December 15.
Robert Eisenbeis, Ph.D.
Vice Chairman & Chief Monetary Economist
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