US: Fed Says Wait Until 2024

As such the Fed is telling us they don’t think that rates will need to rise until 2024, which is understandable given the new policy strategy from the Fed – acknowledging inflation shortfalls can be just as bad as inflation overshoots – and their past track record on hitting the 2% target. This is an implicit acknowledgment that they ran policy too tight in recent years.

Since the beginning of 2010 the Fed’s favored measure on inflation, the core personal consumer expenditure deflator, has been at or above 2% in just 13 months – so a hit rate of one in 10 – posting an average of 1.6% year on year over the past decade.

In terms of their broader forecasts they have revised up 4Q GDP YoY growth for 2020 to -3.7% from -6.5%, but because of the earlier and more vigorous rebound have cut 2021 to 4% from 5% and 2022 from 3.5% to 3%. The core inflation numbers have also been revised a little higher with the core PCE deflator expected to end 2023 at 2%.

New economic forecasts from the Fed

(Click on image to enlarge)

Source: Federal Reserve, ING

Economic slack to keep inflation and interest rates low

The shift in language and the new forecasts are fully understandable with officials emphasizing that the US economy continues to face numerous challenges from Covid-19. Recent data reinforces our view that it will be late 2021 at the earliest before all the lost output is recouped, which points to a large lingering output gap. Meanwhile, the slack in the labor market means little prospect of imminent wage inflation so the chances of the Fed meaningfully improving on its hit rate for 2% inflation anytime soon don’t look great.

Once again, Powell left the door open to further potential action, which would most likely involving additional QE, but emphasized that the Fed can’t generate demand. For that, we will need to see additional fiscal stimulus and Powell again suggested more would likely be needed, but that isn’t going to happen ahead of the 3 November elections and may not come before the end of the year.

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Moon Kil Woong 1 month ago Contributor's comment

Yay so basically they now need to do nothing and all the good news for the next President is pushed up to help the current president. The Fed gets more political and more permissive to help the present at the cost of the future constantly. What happened to a Fed that tries smoothing out the market cycles and preparing for the worst? What happened to constraint and not playing politics? What happened to the Federal Reserve realizing they don't know the future?

Old Time Investor 1 month ago Member's comment

Yes, very troubling.