Rates
- Yesterday, the FOMC voted to keep the Fed Funds target rate unchanged within the 0.00% to 0.25% range.
- This outcome was widely expected, and the committee members voted unanimously in favor of the action.
- Forward guidance on monetary policy now indicates that rate hikes could come as soon as 2023, with the median rate from the Fed’s “dot plot” pointing to two hikes that year. The March plot indicated the committee expected no increases until at least 2024.
Inflation
- Language around the Fed’s average inflation-targeting approach remained unchanged from recent meetings, again noting the Fed will “aim to achieve inflation moderately above 2 percent for some time…”
- The statement acknowledged the recent increase in inflation and reiterated the Fed’s position that it will be short-lived, noting “Inflation has risen, largely reflecting transitory factors.”
- The Fed’s economic projections for inflation increased from the March estimates, with calendar year 2021 indicating the largest increase from previous estimates and more forward projections reflecting the Fed’s position that the inflation uptick is largely transitory. The median projection for 2021 PCE inflation rose from 2.4% to 3.4%, while the 2022 projection rose 0.1% to 2.1%.
Monetary Policy Implementation
- The statement made no mention of tapering and directed asset purchases to continue at the previously established levels for Treasury securities and agency mortgage-back securities. In his post-meeting press conference, Chairman Powell acknowledged that the FOMC discussed the asset purchase program but decided that tapering was not yet appropriate.
- The committee raised the interest rate it pays banks on reserves by 5 bps to 0.15%, and also lifted to 0.05% from 0.0% the rate it pays on overnight reverse repurchase agreements. These items help establish the floor on short-term interest rates.
Economic Conditions
- Yesterday’s statement included a more optimistic assessment of economic conditions, noting “indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement.”
- Following the improved economic outlook, projections for 2021 GDP had another large increase, with the estimate rising to 7.0%versus 6.5% in March and 4.2% in December. The projection for fourth quarter unemployment was unchanged at 4.5%.
The FOMC is next scheduled to meet July 27 – 28, 2021.
Disclosures
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