At today’s (March 17) meeting of its Open Market Committee the Federal Reserve held its target interest rate at 0% to 0.25% and continued its commitment to buying $120 billion a month in Treasuries and mortgage-backed assets, as expected.
But the central bank’s dot-plot survey showed more slippage on projections of when the Fed will raise interest rates. The majority of the Fed officials polled continued to see no interest rate hikes through 2023. But a larger number than in December–7 out of 18, up from 5–now see the first rate increase coming some time before the end of 2022.
In its updated Summary of Economic Projections, the Open Market Committee now expects the unemployment rate to drop to 4.5% by the end of this year (in December the projection was for 5% unemployment by the end of 2021) and for inflation to its 2.2% (in December the inflation projection was that inflation would stay below the Fed’s 2% target rate until 2023. The Fed has also said that it will not consider an interest rate hike until inflation (measured in core personal consumption expenditures) shows signs of “moderately” overshooting that target for some time. The core PCE, which does not include food and energy prices, ran at an annual rate of 1.5% in January.) According to the new projections, U.S. GDP will grow by 6.5% the year, the fastest rate since the 1980s.
The Fed’s statement today said, “Following a moderation in the pace of the recovery, indicators of economic activity and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak.”
In his post meeting press conference Fed chair Jerome Powell said the Fed saw no need to address the recent rise in Treasury yields. The 10-year Treasury closed today with a yield of 1.63%, up just 1 basis point on the day. Asked at the press conference about the move in yields, Powell noted that it was “important conditions continue to remain accommodative” and that he would be concerned by “disorderly markets.” That’s pretty much a repetition of Powell’s standard line for the past month. There is no reason, Powell also said, to expect inflation to climb out of control. “Some upward pressure on prices” is possible, Powell has said, but any increase will be temporary. Last month Powell told Congress, “I really do not expect that we’ll be in a situation where inflation rises to troubling levels. This is not a problem for this time, as near as I can figure, and if it does turn out to be, then we do have the tools we need.”
My suspicion is that the bond market will challenge the Fed chair’s views in the near future by sending bond yields higher.