FOMC keeps policy unchanged, but rate hikes inching closer

Summary

As widely expected, the Federal Open Market Committee (FOMC) refrained from making any major policy changes at its meeting today. But, the Committee upgraded its assessment of the current state of the economy. Specifically, the FOMC now looks for stronger GDP growth, higher inflation and lower unemployment in 2021 than it did three months ago. Although most FOMC participants continue to believe that it will be appropriate to keep rates on hold through 2023, a few committee members look for rate hikes next year and in 2023. The Committee made no changes to the interest rate that the Federal Reserve pays to commercial banks on the reserves that they hold at the central bank.

FOMC Upgrades Its Assessment of the Economy

As widely expected, the Federal Open Market Committee (FOMC) refrained from making any major policy changes at its meeting today. Specifically, the Committee decided to maintain its target range for the fed funds rate between 0.00% and 0.25% and to keep the Fed's monthly purchase rate for Treasury securities and mortgage-backed securities unchanged at $80 billion and $40 billion, respectively. The Federal Reserve will continue to purchase securities at “at least” these rates “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.” The 11 voting members of the Committee voted unanimously to maintain the Fed's current policy settings.

That said, the Committee upgraded its assessment of the current state of the economy. The FOMC said in its January 27 statement that “the pace of the recovery in economic activity and unemployment has moderated in recent months.” Today's statement said that “following a moderation in the pace of the recovery, indicators of economic activity and employment have turned up recently.” But, the Committee did note that “sectors most adversely affected by the pandemic remain weak.”

The Committee's more optimistic outlook for the economy was reflected in its quarterly Summary of Economic Projections (SEP), which summarizes the FOMC's forecasts. The median GDP forecast among the 18 committee members for 2021 rose to 6.5% in the current SEP from 4.2% in the last SEP (December) (Figure 1). The forecast for 2022 edged up to 3.3% from 3.2% previously. The upward revision to GDP growth led to a downward revision in the unemployment rate. Specifically, the median projection now shows the unemployment rate ending 2021 at 4.5%. This forecast had been 5.0% in December. Inflation, as measured by the year-over-year change in the PCE deflator, is forecast to end the current year at 2.4%, up from the 1.8% rate that was forecast in December.

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