The Song Remains the Same: Fed Keeps Rates/Balance Sheet Steady
The FOMC kept rates near-zero and maintained the pace and size of Treasury/MBS purchases to its balance sheet.
Financial conditions remain loose, credit spreads low and access to capital ample.
Quarterly update to economic projections show slightly improved assumptions about GDP and unemployment; but no change to inflation and rate assumptions.
As expected, the Federal Reserve’s Federal Open Market Committee (FOMC) voted unanimously to keep the federal funds target rate in a range of zero to 0.25%; where it’s been since March. A majority of FOMC officials maintained their forecast that the rate would be kept near zero at least through 2023. In addition, the FOMC said it will continue to support the economy through considerable monetary stimulus until it sees “substantial further progress” on its dual mandate of employment and inflation. Specifically, the Fed “will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”
With regard to the Fed’s dual mandate, the FOMC “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% and is on track to moderately exceed 2% for some time.” That was a repeat of the language in the November FOMC statement.
Easing by doing nothing
As mentioned by my colleague Kathy Jones, Schwab’s Chief Fixed Income Strategist, there is plenty of time and room for the Fed to make changes to the composition of its balance sheet in the future; rather than laying out specific plans now. Financial conditions remain very loose; while the U.S. dollar has weakened, credit spreads are very low and there are no signs that companies or individuals are having problems accessing capital. Moreover, inflation expectations are rising, which is keeping real rates in negative territory. In other words, the Fed is actually easing by doing nothing (if it stays with current policy, real rates fall and financial conditions ease).
The Fed also released its quarterly update to its economic projections; with the prior set of estimates released in conjunction with the September FOMC meeting. The new forecasts show a slightly smaller decline in real gross domestic product (GDP) this year, and a small increase in the 2021 forecast. The unemployment rate forecasts show a faster expected decline; reflecting the quick pace at which it’s already declined. Inflation is still projected to get back to 2.0% by 2023; with the majority of officials expecting the fed funds rate to remain near-zero until 2024 or later. Overall, the new Summary of Economic Projections (SEP) table, seen below, show that officials continue to believe that the path of least resistance for inflation remains down.