FOMC Statement and Updated Forecasts

September 16, 2020

I had two quick takeaways from today’s FOMC statement. First, Under the modified FOMC framework for treating its twin policy mandates, forward guidance is expressed in an enlarged paragraph:

The Committee seeks to achieve maximum employment and inflation at the rate
of 2 percent over the longer run. With inflation running persistently below this longerrun goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

This lengthier text doesn’t necessarily enhance the clarity of what the Fed will do under different landscapes. There continues to be scope for discretion as officials on the committee weigh incoming data related to employment, inflation, public health, labor market conditions, inflation expectations, and financial and international developments.

The second takeaway is that there two dissenting votes. Dallas Fed President Kaplan was comfortable with the new articulation of forward guidance but prefers scope for greater policy rate flexibility once conditions are met to begin raising the federal funds rate.

Updated forecasts extend the projected horizon by a year to 2023. As many analysts expected, officials see a less pronounced contraction of GDP this year than thought three months ago and also revised inflation this year higher.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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