In a surprise to no one the Fed left the fed funds rate unchanged today, but did return to forecasting the economy and rates for the first time since the December meeting and the bottom line there is the Fed doesn’t expect to hike rates through 2022. Chair Powell is expected to address at the press conference some additional tools that might be brought to bear on the economy if the hoped-for recovery stalls, or loses momentum. Yield curve caps (whereby the Fed prevents yields from breeching a pre-determined level by buying said security in sufficient quantity), are one such tool but don’t expect to see that operation until later in the year. As mentioned, this meeting marked the Fed’s return to forecasting the economy and rates over the next several years. We discuss that in more detail below but suffice it to say the Fed expects the fed funds rate to remain unchanged through 2022, and that makes sense given their expectation of a slow, grinding recovery. Lower-for-longer just got longer.

As mentioned above, today’s meeting provided an update to the Fed’s rate and economic forecasts for the first time since the December 11th meeting.  The intervening meetings were filled with emergency rate cuts and lending programs, but with those items in place the Fed has returned to forecasting where GDP, unemployment, and inflation along with rates are headed over the next few years. While forecasting in this environment is treacherous, even for esteemed members of the Fed, they see GDP for this year at –6.5%, 5.0% in 2021 and 3.5% in 2022. Unemployment is forecast to be 9.3% year-end, 6.5% in 2021, and 5.5% in 2022.  They see core PCE at 1.0% at year-end , 1.5% in 2021, and 1.7% in 2022. It should be noted the Fed’s forecast is a bit better than the consensus Bloomberg forecasts, but not by much.  As for the fed funds rate, the dot plot median remains at 0.00%-0.25% through 2022 (with only two members expecting a higher rate in 2022). Given the forecasted unemployment and inflation numbers no change to the policy rate makes sense. Finally, the vote was unanimous. The full text of the statement follows:

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world. The virus and the measures taken to protect public health have induced sharp declines in economic activity and a surge in job losses. Weaker demand and significantly lower oil prices are holding down consumer price inflation. Financial conditions have improved, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.

The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor developments and is prepared to adjust its plans as appropriate.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles. 

Published: 06/10/20 Author: Thomas R. Fitzgerald