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Fed Pledged to Continue QE Until “Substantial Progress” Seen in Employment and Inflation

The major changes in the December were forward guidance in the asset purchase program (QE) as well as upgrades in economic forecasts. The Fed left the policy rate unchanged at 0-0.25% and asset purchases at US$120B per month. The updated median dot plot suggests that no rate hike is likely at least until 2024.

As suggested in the policy statement, the Fed introduced a qualitative outcome-based forward guidance on QE. It pledged to “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”. Policymakers believed that “these asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses”.

No change has been announced in the average maturity of bond purchases, though. At the press conference, Chair Jerome Powell noted that extending the purchase horizon would be unlikely to have a material inflation effect, given the significant disinflationary pressures around the world. He added that “as things have become a bit clearer, we’ve begun to strengthen and we’ve begun to strengthen and clarify some guidance. We think our current policy stance is appropriate. Financial conditions are highly accommodative”.

The members maintained a cautiously optimistic outlook on the economy. In light of the strong 3Q20 data and vaccines, the staff upgraded the economic outlook. GDP growth forecasts were revised higher significantly from 2020 to 2022, while the unemployment rate was revised lower through 2020 to 2023. It was noted that “fewer participants see the risks weighted to the downside than in the September forecasts”. Inflation forecasts were also upgraded modestly, though maintaining the view that the 2% target will be attained only by 2023. The Fed reaffirmed that it would accept inflation “to moderately exceed 2% for some time”.

The median dot plot continued to suggest that no rate hike is likely at least until 2024. Only one member expects a hike in 2022. Yet, there are now five, up from four in September, anticipating a hike in 2023.