The American economy has entered a period of recovery that will be followed by a robust expansion, leading it almost surely to the pre-pandemic level of output in the near term and a return to full employment in 2022.
With the end of the pandemic in sight, the Federal Open Market Committee, at its meeting on Wednesday, noted an improvement in the rate of vaccinations, economic growth and employment, all of which signal that there will be an upgrade in the forecast when the next Summary of Economic Projections is published at the June meeting.
Most important, the attention given by Federal Reserve Chairman Jerome Powell during his press conference to addressing the scope of the public health crisis and the challenging labor market strongly suggests that the Fed intends to maintain its policy goals and objectives.
The Fed refused to alter its view on inflation, saying any price increases are transitory.
The Federal Reserve made no substantial changes to the path of interest rates, its monthly $120 billion in asset purchases ($80 billion in Treasury bills and $40 billion in mortgage-backed securities), overnight interest rates or interest paid on excess reserves.
As expected, the Fed in its policy statement upgraded its economic outlook by changing the language to “amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened.” We interpret that statement as the operationalization of Powell’s assessment that the economy has reached an inflection point.
Perhaps just as important, the Fed refused to alter its view on inflation by noting “inflation has risen, largely reflecting transitory factors.” Those words, like the Fed’s language on the pace of asset purchases, are a strong signal that the Fed does not intend to provide any projections on when it will start tapering its asset purchases or budge on its views of pricing and the economy.
Powell left no doubt in his press conference that it is not yet time to begin discussing the tapering of the Fed’s asset purchase program. The Fed will remain quite accommodative in its policy stance even as it signals a robust expansion and declining unemployment.
Given that the consensus forecast on first-quarter gross domestic product — the initial estimate will be published Thursday morning — is approaching 7%, investors and firm managers can infer that policymakers are anticipating a robust period of recovery and expansion in the economy this year.
Despite the economic boom that is underway, central bankers are in no hurry to alter policy and will be patient on the evolution of both inflation and employment.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
