FOMC Statement, Forecasts, and Powell Press Conference

December 16, 2020

Today’s FOMC statement elaborates on text in the sentence dealing with¬† monthly increased holdings of Treasury securities and agency mortgage-backed securities, spelling out the amounts of at least $80 billion in the former and at least $40 billion in the latter. Those figures in fact represent the current pace, so the added words do not imply an immediate action change.¬† The text is otherwise the same as in November.

Projected growth has been raised 0.2 percentage points to 4.2% in 2021 and and 3.2% in 2022. Growth this year is now estimated at -2.4% compared to -3.7% before, and projected 2023 growth was cut 0.1 percentage point to 2.4%. Long-run potential non-inflationary growth was also sliced 0.1 percentage point to 1.8%. Unemployment is seen as lower than the prior forecast for all years, including 3.7% in 2023, which lies below the longer-run tendency of 4.1%. Inflation inf 2021 and 2022 was revised up 0.1 percentage point, but inflation doesn’t reach 2.0% until 2023 as was the case before.

The assumed federal funds rate path is flat-lined through 2023 at 0.1%, as was the case before.

The questions directed at Chairman Powell repeatedly returned to the matter of a fiscal stimulus. He left no doubt that the economy remains in a challenging near-term period and that substantial fiscal support is needed soon. The Fed expects such to be done, and its baseline forecast assumes it happens. But he drew the line against offering any opinion on the size and composition of the aid, as responsibility for such lies with the Congress to whom the Fed as an institution is accountable and from whom the Fed enjoys almost unique policy-making independence. Congress is in fact working on two packages, the second of which is less likely to get passed because it includes the two controversial matters of support for state and local governments and immunity of businesses from liability if workers contract Covid. Regarding aid to state and local governments, Powell did offer this information that the central bank is monitoring. States with big tourism and gas&oil sectors that are vulnerable if current aid ends on December 31 as now scheduled. Many other states are not, and so the national economic effect is not all one-sided. But states employ a huge number of employees, and there is a risk that the squeeze on public sector workers could produce a lot of damage rippling out into the broader economy.

In response to a questioner asking why no additional easing was undertaken now insofar as the recovery had cooled, public sector workers may face big drops in their purchasing power, and inflation remains well below target and isn’t expected to reach 2.0%, let alone exceed such, over the coming three years. Powell responded that monetary stimulus currently is very stimulative (the Fed balance sheet is seven times greater than before the Great Recession and on a course to expand much further), interest-sensitive activities are growing very robustly, financial institutions and financial market stability are not in stress, and the continuing drag on the economy stems from the pandemic, which is best addressed by fiscal rather than monetary policy.

The gist of answers to several questions about inflation is that the United States is many years away from meeting the mandate of inflation moderately above 2% for some time so that it averages 2.0% over time with longer-term inflation expectations also remaining well anchored at 2%. Developments may happen that could push some prices sharply higher and even temporarily lift overall prices, but it’s highly doubtful that the Fed will need to take action against inflation being excessive for the next couple of years.

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

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