“The (FOMC) Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running 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. 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.” (The Federal Reserve, Dec. 16, 2020)

At its last FOMC policy meeting for 2020, the Federal Reserve formally wrapped up what could turn out to be one its most activist year in its history.  To no one’s surprise, the Fed left its policy interest rates at rock bottom and to reconfirmed that it was willing to continue to massively support the economy through the challenging pandemic era.

The Feds last policy statement and economic projections indicate that its officials are currently somewhat more optimistic that the negative economic effect of the coronavirus pandemic will be smaller than it had expected in September. 

At its recent December 16^th FOMC meeting, the Fed decided to continue holding its baseline interest rate range at 0 to 0.25%, and as the accompanying projections indicate, the federal funds rate is projected to remain at this level for a number of years.  

The following table reproduces two versions of the Fed officials’ consensus projections, a medium version, and a central tendency version. 

Based on these projections, it is clear why the FOMC plans to hold its baseline federal funds rate between 0 to 0.25% at least through to the end of 2023.  

In addition, as of the fourth quarter of this year, the US real GDP is still expected to be about 2.4% below the year ago level, though real GDP is expected to recover by about 4.2% as of the fourth quarter of 2021. 

The projected growth estimates for next year’s expansion economic ranges between a low of 3.7% and 5% on the high side. 

The FOMC’s estimate of year-end unemployment rate is expected to be 6.7% in December of 2020, 5% in December 2021, 4.2% in 2022 and 3.7% in 2023. In other words, as a result of the rather slow expected recovery though to the end of 2023, the unemployment rate is not expected to decline to the 3.5% low average rate it posted in 2019. 

Finally, one of the by products of the Fed’s aggressive bond buying policy has been the rather sharp decline in credit spreads. The credit spread is often calculated as the difference in yield between a US treasury bond and a corporate debt security of the same maturity but different credit quality. As an example, a 10-year Treasury note with a yield of 5% and a 10-year corporate bond with a yield of 7% are said to have a credit spread of 200 basis points. When the spread narrows, the yield difference decreases, which suggests a more favorable outlook for risk assets such as equities.

Fed Officials Projections for The US Economy

(Note: The projections reflect year end assessments. i.e. The GDP and inflation projections represent changes from the fourth quarter of the previous year to the fourth quarter of the year indicated. The unemployment rates and the federal funds rates are as of December of the year.)