Fed Leaves Rates Unchanged at Least Until 2023
The Federal Reserve of the United States (Fed) delivered its FOMC Statement and staff projections yesterday. The much-awaited event did not clarify how the Fed is going to calculate average inflation and the only new thing out of the new Fed’s mandate was strong forward guidance.
Yesterday’s press conference, though, may make history. It is the first FOMC Statement and press conference under the “new Fed”, one that operates with a different mandate – average inflation targeting (AIT).
What Did and What Did Not Say the Fed?
First of all, the Fed signaled its intention to keep the federal funds rate close to the zero boundary for at least until the end of 2023. That means minimum three years forward, the Fed remains in an easing mode.
Of course, everything remains data-dependent, in the sense that if there is the need to do more, the Fed will do more. Therefore, more easing is somehow granted somewhere along the line.
Second, there is no known path regarding how the economic picture evolves. The economy rebounded, and this is a stronger recovery than what the Fed first believed possible. However, the pandemic uncertainty makes all progress questionable.
Third, the Fed’s new AIT mandate does not forget about employment. The Fed would love to see unemployment back to the 3.5% level, albeit it recognizes that there is a long way until such levels will be reached again.
On the inflation front, the Fed signaled its willingness to let inflation moderately higher but again failed to explain what it considers moderate inflation. Just like when it announced the change in the policy, at the August Jackson Hole Symposium, the Fed did not want to commit to any measure describing moderate inflation.
Finally, many participants expected the Fed to announce some new measures yesterday. However, all that was new was a strong forward guidance, albeit there are already two dissenters inside the FOMC that do not agree with the full form of the current forward guidance. One last thing – the Fed did consider a new wave of fiscal stimulus coming, so that we can all price in already.
All in all, a balanced press conference, with the Fed in wait-and-see mode.