FOMC Review – Fed Revised Economic Projections Significantly Higher, while Pledged to Keep QE Size Unchanged Until Actual Progress is Seen in Economy

The staff significantly upgraded economic projections. While the policy rate will unlikely change before 2024, the median dot plot reveals that more members are now projecting rate hikes in coming two years. As widely anticipated, the Fed left all monetary policy measures unchanged: The size of asset purchases stays at US$120B per month and the Fed funds rate at 0-0.25%

Policymakers turned more upbeat about recent economic developments. They noted in the policy statement that “following a moderation in the pace of the recovery, indicators of economic activity and employment have turned up recently”. While noting that “inflation continues to run below 2%”, the language that “weaker demand and earlier declines in oil prices have been holding down consumer price inflation” was erased”.

On economic projections, the staff forecast the economy would expand +6.5% y/y this year, up from +4.2% estimated last December. Growth would slow to +3.3% (Dec: +3.2%) in 2022 and then to +2.2% in 2023 (Dec: +2.4%). The longer-run GDP growth forecast stays unchanged at +1.8%. The unemployment rate is projected to drop to 4.5% (Dec: 5%) in 2021, and then to 3.9% and 3.5% in 2022 and 2023 respectively. Inflation outlook is also revised higher. Both headline and core PCE readings are projected to rise above +2% over the forecast horizon.

Concerning the new median dot plot, although it continues to project no rate hike through 2023, there are 4 members who expect rate hikes in 2022 and 3 more expect increases in 2023. At the press conference, Fed chair Jerome Powell indicated that “the bulk of the committee, the largest part by far of the committee, doesn’t show a rate increase during this period”. He also discussed about QE tapering, noting that “substantial further progress” in the economic recovery is needed before tapering. He stressed that it should be “actual progress, not forecasted progress”, adding that the Committee will provide “as much advance notice of any potential taper as possible”.