The December FOMC

Prior to the Fed’s December FOMC meeting, there was a general consensus among economists (see the December NABE forecast, for example) that the Committee would not change its federal funds rate target.

Federal Reserve - FOMC

But the media was filled with speculation that the FOMC would possibly increase its asset purchase program or begin to purchase longer-maturity Treasuries. At least one writer argued, however, that the FOMC would not make any changes in policy; and aside from the rearrangement of a couple of sentences in the Committee statement, that is exactly what happened.

Foremost on the FOMC members’ minds, as evidenced by both the statement and Chairman Powell’s opening statement at the press conference, was the pandemic and its impacts on the economy. Partly as a consequence of developments on the vaccine front, the Committee’s outlook, as revealed in its new Summary of Economic Projections (SEP), showed less decline in 2020 real GDP (from -3.7% to -2.4%), slightly stronger GDP growth in 2021 (from 4.0% to 4.2%), and a 0.2 percentage point increase for 2022. Similarly, the Committee saw nearly a half percentage point improvement in unemployment for 2021, from 5.5% to 5%, and further declines in 2023 and 2024. There was little change in the Committee’s PCE inflation projection, which continued below its 2% target through 2022.

More interesting was Chairman Powell’s press conference, for three reasons. First, he emphasized that the FOMC had a new policy framework consisting of an accommodating monetary policy using asset purchases and the target range for the federal funds rate, an average 2% inflation target with a stable 2% market inflation expectation, and forward guidance. The forward guidance stated that policy would be accommodative until labor market conditions reached levels consistent with the Committee’s estimate of maximum employment and until inflation had reached 2% and was on track to moderately exceed 2% for some time. We were left with the impression – supported by the SEPs – that it would be well into 2022 before we might expect any adjustments in policy.

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Disclaimer: The preceding was provided by Cumberland Advisors, Home Office: One Sarasota Tower, 2 N. Tamiami Trail, Suite 303, Sarasota, FL 34236; New Jersey Office: 614 Landis Ave, Vineland, NJ ...

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