The FOMC meeting today will offer investors the full panoply of Fed resources from which it impacts the market. While there is no change in policy expected, nor any indication that a change is coming in the near future, they will update their rate and economic forecasts and that will provide plenty of fodder to try and divine Fed thinking about their reaction function regarding when to adjust policy. Recall back in August the Fed laid out three criteria for when policy might change and they haven’t deviated from that since. First, core inflation needs to reach 2%, and be trending over 2%, and maximum employment needs to have been reached. The Fed will likely reiterate today they are still a long way from achieving those goals. We talk more below about what to expect from the Fed today. Finally, in our latest podcast we sit down with SouthState COO Renee Brooks  to discuss the latest topics and trends in digital banking. The iTunes link can be found here and the Spotify link here.


Economic News

The FOMC meeting concludes later today and we wanted to share some things we think will come out of the meeting and some things we think won’t. Being  a quarter-end meeting it carries with it updated economic and rate forecasts that will stretch into 2024 for the first time and we think those updated forecasts/projections could be the highlight of today’s meeting.

  • First, while the market has been busy pricing in a first rate hike in 2023, the Fed is likely to keep 2023 at the zero lower bound but with some rate hikes in 2024. At the December meeting, five members penciled in 2013 rate hikes, with one projecting the ending rate at 1.125%. The median, however, was solidly in the zero lower bound camp. It would take four additional members to join the five from December to move the median off zero. We’re splitting hairs here but suffice it to say the new dot plot will get serious scrutiny.
  • The new economic forecast is likely to come in for improvement. In December the Fed forecast 2021 GDP at 4.2% versus the current Bloomberg consensus at 5.6%. With the third stimulus bill now law, and vaccine numbers continuing to improve, the Fed will no doubt bump their GDP forecast, but how high? Given their continued concerns over the public health situation they probably won’t be super optimistic but a 5-handle GDP forecast is possible. Also, in December the Fed never had core PCE rising above 2.0%. We think they do this time given the better growth picture and the patient approach with fed funds remaining at the zero lower bound. We think the Fed wants to show it is serious about letting inflation trend above 2% for a time so as to achieve maximum employment and this is a good way to express that.
  • The unemployment rate forecast will come in for improvement as well. In December’s forecast, 2021 unemployment was projected to be 5.0%. We’re already at 6.2% so improving on the December forecast is likely. December’s forecast also had unemployment moving to 3.7% in 2023, close if not at full employment. Do they move that rate even lower today? They could. Several Fed officials have been on record that the unemployment rate by itself is not a good indictor of labor market health. With the labor force shrinking by nearly 5 million over the last year they could still forecast a near record low unemployment rate and still proclaim the labor market is not back to its pre-pandemic standing.

In the end, we think the Fed will want to project a steady-as-she-goes approach at today’s meeting. No change to current policy nor any contemplation at this time of changing policy in the near future. The Fed still sees 10 million unemployed from the pandemic and another 4 million having left the labor force, and until those numbers improve significantly the Fed will see its work as undone.


Underemployment Rate Still Signals Plenty of Repair Work Ahead

We just talked about the one of the economic metrics the Fed forecasts is the unemployment rate and any changes to the rate today will be studied thoroughly. But the Fed has been adamant in this downturn that looking at just one metric to measure the health of the labor market is a fools errand. This is probably always the case but especially with the unique damage that has been wrought by the pandemic. Given the slow return to work in many sectors, and with millions of children homeschooled for the past year, unique changes have taken place to the labor market that just don’t get captured in the well known unemployment rate. That rate is simply those without a job but are also looking such that they are included in the labor force total.

 

 

However, given the slow return to work for many business, and millions of children forced to school at home, over 4 million people have left the labor force in the past year. That is they are not working nor are they looking right now. Thus, they are not counted as unemployed nor in the labor force. It’s as if they just disappeared but they are out there and many will want to return to work once the situation allows. The U6 underemployment rate tries to capture a broader swath of potential workers. It includes the traditional unemployed and also those working part-time but wanting full-time work (the underemployed), and finally it includes those marginally attached to the labor force:  not working and not currently looking but that want a job and have looked in the past twelve months. The pandemic has broadened the numbers in all these groups. The graph tracks the underemployment rate going back to the GFC recession. It’s also easy to see the slow grind back down coming out of that recession and while we are likely to see some significant improvement this year because of larger fiscal stimulus than was the case coming out of the GFC, it will likely slow as it did before once fiscal stimulus wanes spelling the need for a lengthy period of monetary accommodation.

 

 


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 0.11 0.35 0.68 1.07 2.13 2.59
0.50 0.09 0.32 0.62 0.96 1.99 2.48
1.00 0.09 0.29 0.59 0.92 1.90 2.35
2.00 0.28 0.53 0.84 1.78 NA
3.00 0.79 1.72 NA
4.00 1.67 NA
5.00 1.63 NA
10.00 NA

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Published: 03/17/21 Author: Thomas R. Fitzgerald