The Federal Reserve’s Policy Statement

Here’s the Fed’s statement:

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

Progress on vaccinations has reduced the spread of COVID-19 in the United States. Amid this progress and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement. Inflation has risen, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The path of the economy will depend significantly on the course of the virus. Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will 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. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Charles L. Evans; Randal K. Quarles; and Christopher J. Waller.

Here are the economic projections.

My Comments

Bottom line. The Fed didn’t make any changes to interest rates. The Fed will continue to buy $120 billion in bonds each month. The Fed didn’t make any changes regarding the language of its bond buying.

The central bank noted that inflation is rising but reiterated that it thinks it is transitory. That’s basically what it said last time. The Fed also said that economic activity has strengthened. The vote today was unanimous.

Now let’s turn to the Fed’s economic projections. The Fed increased its forecast for inflation for this year from 2.4% to 3.4%. That’s a big increase considering the year is nearly half over.

The Fed raised its GDP outlook for this year from 6.5 to 7%. The forecast for unemployment is unchanged at 4.5%. I think that’s too optimistic, though I hope it’s correct.

Now here’s the big change. Seven Fed officials see a rate hike coming sometime next year. That’s up from four at the last meeting. (Specifically, five see one hike and two see two hikes. Previously, three saw one hike and one saw two.)

The market is taking this as a hawkish statement. Almost immediately, the Dow fell 200 points. At its low, the S&P 500 was down more than 1%. The yield on the 10-year Treasury rose about four basis points.

Posted by on June 16th, 2021 at 2:00 pm


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