FOMC Meeting on 16 June 2021

Last week’s Federal Open Market Committee (FOMC) meeting did not lead to any policy action, but the median of members’ macro-economic projections showed a shift in rate expectations.¹ These projections are for the end of 2021, 2022, 2023 and the “longer run,” which the FOMC has indicated may be about seven years ahead.

While members altered little their views on the evolution of the unemployment rate, they raised their projection of 2021 real GDP growth to 7%. However, their views on real GDP growth in 2022, 2023 and in the “longer run” were broadly unchanged. Thus, they regard the current high growth rate as temporary and related to the reopening of the economy.

Chart 1. Unemployment rate (%)

Chart 2. Real GDP growth (%)

Source: Federal Reserve Board, 16 June 2021

Similarly, members raised their projections for headline and core Personal Consumption Expenditures (PCE) inflation in 2021 to 3.4% and 2.4%, respectively, but left their projections for 2022, 2023 and the longer run broadly unchanged.² Overall, these projections indicate that FOMC members expect the current rise in inflation will be short-lived and driven by factors linked to the reopening of the economy. Inflation is projected to be about 3% in 2022 and close to the FOMC’s 2% objective in 2023.

Chart 3. PCE inflation (%)

Chart 4. Core PCE inflation (%)

Source: Federal Reserve Board, 16 June 2021

Turning to interest rate policy, the medians of members’ projections for the federal funds rate in 2021 and 2022 were unchanged (although three members projected that they would raise rates once, and two members projected that they would raise rates twice in 2022).

In 2023 the median projection was for an increase to 0.625% as two members projected one interest rate increase, three members two increases, another three members three increases, and two members six increases. The median for the federal funds rate in the longer run remained at 2.5% (and is not shown for clarity).

More interesting is the average projection for the federal funds rate, which displays better how sentiment in the committee changes over time. In approaching an interest decision, often one or a few members start to believe that policy needs to be changed. That changes the average interest rate projected, but not the median. Over time, as the number of members in favour of a change rises, the average projected rate changes too. Only when a majority is in favour of change will the median change. Thus, shifts in the average projected interest rate are likely to give better forewarning of future policy changes.

The average federal funds rate projected in 2021 is 0.125%, rising to 0.250% in 2022. This captures the fact that 8 of 18 members expect to increase interest rates in 2022. While that is not enough for a majority, it requires only two further members to changing their views to make the median indicate an increase in 2022.

The average federal funds rate projected for 2023 is 0.694%, that is, close to the median projection (and, not shown, a projection of almost exactly 2.5% in the longer run).

Chart 5. Median federal funds rate

Chart 6. Average federal funds rate

Source: Federal Reserve Board, 16 June 2021

In the press conference Chairman Powell signalled that the economy is recovering somewhat faster than FOMC members had previous anticipated. He went on to say that “ … reaching the standard of the “substantial further progress” (that is necessary before it becomes appropriate to tighten monetary policy) is still a ways off, participants expect that progress will continue." The labour market was improving rapidly, and he expected a return to a tight labour market.

While the median dot plot pointed to interest rate increases in 2023, he noted that the dot plots are individual projections and not committee forecasts, and that FOMC members had not had a discussion of whether a lift-off would be appropriate in any particular year since that would be highly premature. Overall, he pushed back very strongly against the idea that the Fed was planning interest rate increases. 

Powell said that bond purchases will continue at the current rate of $120bn per month. He provided no guidance as to when tapering might occur, although the FOMC clearly believes that that will happen earlier than it previously expected. While the FOMC had discussed tapering, it seems likely that they so far have focused on the modalities of tapering (such as under what economic conditions tapering could start, how fast bond purchases should be cut back and how much forewarning market participants might need) rather than on discussing whether to taper or not.

¹ https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20210616.htm
² There are no data on the median of members’ view of core inflation in the “longer run.”