FOMC Statement, Projections, and Press Conference

December 15, 2021

In several respects as implied in today’s statement, Fed officials are more comfortable now than in early November with removing accommodation.

The tapering of monthly bond purchases was increased significantly and on a pace to end after mid-March rather than at mid-2022.

The projected likely fed funds rate level a year from now is 0.6 percentage points higher than before, thus suggesting 2 or possibly 3 25-basis point hikes that year. Such would be followed by four such hikes in 2023 and one or two  more in 2025.

The growth of activity and employment assessments are more robust than in the November statement.

Inflation this year measured by the PCE price deflator is put at 5.3%, up from 4.2% in the September forecast and a forecast of 3.4% made last June. Core PCE this year will be 4.4% versus 3.7% predicted in the September forecast.

Real GDP is projected to rise 4% next year, then 2.2% in 2023 and 2.0% in 2024.

Takeaways from Chairman Powell’s press conference

  • The labor market has been making rapid progress toward the Fed’s notion of maximum employment. The only major laggard among the many indicators that collective shape the FOMC’s judgment over whether maximum employment exists is labor force participation. For many of the other indicators, the labor market is hotter now than at its peak in the prior business upturn.
  • Inflation is expected to remain elevated well into next year. This part of the Fed’s mandate for interest rate liftoff has essentially been  met already.
  • The U.S. economic situation now is significantly more robust that existed last spring and was expected to be seen back then when a long lag between ending bond purchases and an interest rate liftoff had been postulated. That lag now appears likely to be much shorter than was believed then.
  • We are not going back to a pre-pandemic economy. The notion of maximum employment then is different from what such means now. A combination of 4% GDP growth and 3.5% unemployment at the end of 2022 is quite strong.
  • The Fed is guarding against inflation becoming more entrenched. So far, wage pressures haven’t been a big factor in this year’s rise of inflation, but that is a future risk. Fed policy will be prioritizing price stability versus maximizing employment to a greater extent in the future.

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

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