FOMC Statement, Forecasts, and Press Conference

September 22, 2021

Reassured investors reacted bullishly in an initial way. Stocks, which already were higher on the day, rose further. Long-term Treasury yields slid a bit, and so did the dollar.

The FOMC statement¬†confirmed “that a moderation in the pace of asset purchases may son be warranted,” which investors believe implies sometime in the coming quarter. But details about such a scale-down were left out of the statement, and the projected likely path of the fed funds rate implies only 1-2 small rises during 2022 as well as a wide dispersion among FOMC members regarding the appropriate trajectory of the rate in 2023 and 2024.

The statement points to significant uncertainties in the economic outlook, much of which relates to Covid. Higher infection rates have “slowed the recovery,” but inflation, which was “rising” at the time of the late July meeting, is now deemed to be “elevated. At the July meeting, the Committee merely committed to continue assessing progress toward its maximum employment and price stability. Today’s statement proclaims that “if progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.”

As seemed likely, projected GDP growth in the U.S. this year was downgraded, but the drop exceeds the upgrade from 6.5% anticipated in March 2021 to 7.0% thought likely at midyear. Now officials foresees just a 5.9% rise of GDP this year but have upgraded 2022 growth to 3.8% from 3.3% in the prior forecast. They predict 4.2% inflation this year followed by 2.2% in both 2022 and 2023 and then 2.1% in 2024.

Questions fielded at Chairman Powell’s press conference ranged widely. On the matter of tapering monthly bond purchases, the go-ahead to begin seemed likely at the next meeting unless forthcoming employment reports are outright poor. Sufficient progress on the price stability goal has been met in the whole committee’s view. Opinions on maximizing employment are more diverse. Many feel that sufficient progress has already accumulated, while others would like to see a bit more evidence since participation rate have been dented by the Delta Variant. While decisions haven’t been finalized regarding many details of the tapering, three points were offered: 1) tapering will likely be completed by mid-2022; 2) tapering could be accelerated or slowed in response to unfolding data and other pertinent information; and 3) there will not be an interest rate lift-off until tapering is ended.

Committee members as a whole think the appropriate rise of the fed funds target from the current 0-0.25% target would see end-year levels of 0.3% next year, 1.0% in 2023, and 1.8% in 2024. However, the further out in time, the greater is the spread of individual views. For end-2024, one member considered 0.625% an appropriate level, while another wanted the rate as high as 2.625%. In between, three others didn’t want the target to reach even as high as 1.0%, nine favored a level between 1.0% and 2.0%, six favored 2.125% and one other favored 2.375%. Views about longer-run price stability also were not monolithic but rather ranged from 2.0% to 3.0% and gravitated mostly at 2.5%. In discussing future monetary policy, Powell repeatedly returned to measure of longer run expected inflation. When circumstances regarding the twin mandates of the central bank are in conflict, the situation that could not be long tolerated would be a sustained rise of expected long-term inflation into above-target territory. That so far has not happened. Longer-term measures are hugging close to 2.0%.

Several questions involved the revelation that the Fed District Presidents in Boston and Dallas may have crossed the ethical standards governing personal asset transactions by Fed officials.¬† Powell was asked about his own status, since his term as Chairman ends next January, but he declined to comment on such. On the Evergrande financial difficulties, Powell drew a big distinction between that Chinese firm’s troubles and the U.S., where corporate debt defaults have lately been quite low. Perhaps most important, Powell used the strongest imaginable language in characterizing the possibility of a U.S. government debt non-payment as catastrophic and something whose serious consequences could not be prevented fully by Federal Reserve action.

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



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