The Federal Open Market Committee’s quarterly projections for economic growth, unemployment and inflation suggest the economy will be back on track and meeting pre-pandemic expectations by the end of 2022. This should play a role in resetting interest rate expectations by professional investors and firm managers over the next 18 months.
The median projections of Federal Reserve Board members and Federal Reserve Bank presidents from various regions anticipate that the unemployment rate will fall to 3.8% by the fourth quarter of 2022 from the current unemployment rate of 5.8%. The Fed expects the personal consumption expenditures inflation measure to stabilize at 2.1% by the end of next year, after months of transitory factors that pushed it as high as 3.6% in April.
Within the context of meeting its dual mandate of full employment and price stability, the FOMC expects that real GDP growth will recede from an elevated height of 7% projected for the fourth quarter of 2021 to 3.3% in 2022. The Fed is looking for a further drop to 2.4% in 2023 as the economy stabilizes towards its potential rate of growth.
Further progress in the vaccination program and progress in the economy should allow the Fed to consider adjustments to its policy over the coming months. Given the degree of public health uncertainty remaining both domestically and among our trading partners, we expect a deliberate approach, with the FOMC raising its policy rate by the end of next year.