FOMC Statement, Projections, and Press Conference

March 17, 2021

The FOMC voted unanimously (11-0) to retain the 0 to 1/4 percent federal funds target and continuing quantitative stimulus (purchases of at least $80 billion per  month of Treasury bonds and at least $40 billion of agency mortgage-backed securities. Forward guidance was not modified but the released statement did tweak its projections. Growth conditions were upgraded and, regarding inflation, a stress at the prior meeting on the drag of last year’s drop in oil prices was replaced by the simple declaration that “inflation continues to run below 2%.”

Projected GDP growth in 2021 was revised upward by 2.3 percentage points from 4.2% to 6.5%. This was pretty much expected.  Projected growth in 2022 was nudged up 0.1 percentage point to 3.3%, while growth in 2023 was lowered to 2.2% from 2.4%. Projected unemployment was lowered for all three years to 4.5% in 2021, 3.9% in 2022, and 3.5% in 2023, but non-inflationary longer-run joblessness was also lowered to 4.0% from 4.1%. Regarding inflation as measured by the PCE deflator, officials now see 2.4% this year, an upward revision of 0.6 percentage points, followed by 2.0% in 2022 and 2.1% in 2023, which have been each raised 0.1 percentage point. Core PCE in 2022 and 2023 follows the same trajectory as total PCE. Most significantly, the expected federal funds projection is unchanged throughout the forecast horizon at 0.1%.

Between the release of the FOMC statement and projections at 14:00 EDT and the end of Chairman Powell’s hour-long press conference some ninety minutes later, the 10-year Treasury yield had declined three basis points, the S&P 500 had risen 0.8%, and the dollar had weakened 0.5% against the euro and 0.4% versus the yen. All these market movements were consistent with a message that policy settings will be left on hold for a considerable time longer. The myriad of questions from reporters frankly seemed to be overthinking what the Fed can definitely say about future policy. Forward guidance doesn’t mean pre-deciding that exactly when the first interest rate hike will happen. Amid the uncertainty of not knowing a lot of unique things happening all at once. Rather forward guidance firstly is stating that policy will be data dependent and then spelling out the economic conditions that must be met before the Fed starts to trim stimulus. Powell was clear on both counts, and he also said that the Fed will verbally tell the world when it begins to consider a policy shift and that a lot of time is likely to pass between that signal and when the action is actually done. And remember this, the Fed over the past couple of decades has been far from clairvoyant in predicting the U.S. economy. An analyst with a better forecasting accuracy than the Fed would have a leg up on the timing of the first rate hike. Powell has merely publicized the types of information that the Fed will be looking at and the conditions that must be satisfied for tapering. Frankly, that’s the only authentic answer he could give.

For those who still believe that a couple of quarters of inflation at or somewhat above 2.0%, consider these two gaps. First, Powell said that a lot of labor market variables are monitored to tell if the goal of maximum employment has been met. In each of the final two decades of the last century, U.S. jobs expanded at a 1.83% annual rate. And if that pace had simply continued after December 1999, U.S. nonfarm payroll employment would now be about 191 million workers, a whopping 48 million, or one-third, greater than the level last month. Second, the inflation goal to to achieve “inflation moderately above 2% for some time so that inflation averages 2% over time.” The PCE price deflator over the seven years from 2014 through 2020 averaged 1.3% per year, so some time technically needs to be an appreciable span of time to counterbalance all the years when inflation was falling so far short of 2%. To be sure, one can be quite sure monetary officials will not have the patience to allow seven offsetting years of 2.7% inflation because that likely would unravel the conditions of keeping longer term inflation anchored to 2.0%. But the patience will be greater than what the reporters wanted to hear.

A final observation of the press conference is the total lack of questions about the exchange rate of the dollar. There are other central bankers such as those at the ECB and Bank of Japan who are becoming concerned about a weaker dollar, and avoiding that possibility means a great deal to them especially at a time when the U.S. is coming out of the pandemic with comparatively strong growth.

Copyright 2021, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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