At the end of the two-day monetary policy meeting last Thursday, the Federal Reserve held the federal funds rate unchanged at the targeted range of 0-0.25% while keeping monetary policy at status quo as widely expected. The Fed has updated their forward guidance after the recent adoption of Average Inflation Targeting. In the statement, the Fed highlighted that they will allow inflation to run slightly above their 2% target for “some time” so as to achieve an inflation average of 2% gradually. This will allow long-term inflation target to remain steadily at 2%. The Fed also highlighted that it will be appropriate to maintain the federal funds rate at its current target range until the labor market has achieved maximum employment and inflation has been running slightly above 2% for some time.
However, a couple of dovish FOMC members voted against the action. Neel Kashkari prefers the Committee to keep the Federal Funds Rate at its current target range until core inflation reaches 2% at a “sustained basis” rather than for “some time”, expressing a more conservative view; while Robert Kaplan prefers the Committee to “retain greater policy rate flexibility” even after the U.S. economy has overcome the impact of the pandemic and achieved maximum employment and price stability goals, suggesting the possibility of an extended period of low rates.
The released economic projections displayed a less pessimistic outlook for this year. GDP for 2020 is forecasted to decline at a slower pace as compared to the previous forecast in June while the unemployment rate is forecasted to be lower than its previous forecast. Both PCE inflation and core PCE inflation this year are also forecasted to be higher. However, PCE inflation is forecasted to hit the Fed’s target of 2.0% only in 2023 and unemployment rate is forecasted to return close to its pre-pandemic level during that year. This implies the possibility that the federal funds rate may stay at the current target range through 2023 before the Fed considers any hike. Furthermore, looking at the dot plot, only 1 out of 17 committee members voted for a rate hike in 2022 while only 4 voted for a rate hike in 2023, implying that a majority of the committee members voted for the Federal Funds Rate to stay unchanged at least through 2023.
(This article was originally published on Samtrade Academy on 21 September 2020)
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