Federal Reserve Chairman Jerome Powell said in the opening statement of his news conference on Wednesday that the arrival of vaccines has bolstered the economic outlook for later this year and noted the role of monetary policy in combating the economic downturn caused by the pandemic.
At the same time, Powell, in remarks following the Federal Open Market Committee meeting, said that the economy remains far from the Fed’s employment and inflation goals, while noting that its forward guidance on rates and balance sheet policy will likely not change anytime soon.
Powell also carefully made the case that it’s likely to take some time before substantial progress is made on meeting the central bank’s objectives on employment and inflation.
This acknowledgement of a slower pace of recovery and the considerable distance from the Fed’s employment and inflation goals will surely bleed into the larger economic debate on the Biden administration’s $1.9 trillion fiscal aid proposal. This is what the effective integration of fiscal and monetary policy sounds like, and it points to what the post-pandemic policy landscape will look like.
The Federal Reserve kept its policy rate between 0 and 0.25 basis points, did not change its monthly pace of asset purchases of $80 billion in U.S. Treasurys and $40 billion in mortgage-backed securities and did not alter the overnight interest rate it pays against excess reserves. The committee made no change to its forward guidance on rates, nor do we anticipate that happening until 2024.
The only notable change in the statement language was the removal of a reference to the near term in respect to the pandemic continuing to act as a deadweight on the economy, employment, inflation and its risk to the outlook. We interpret this as an acknowledgement by the Fed of the obvious economic scarring within the labor market, particularly in portions of the service sector.
One can infer that this underscores the Fed’s flexible average inflation target and its willingness to let inflation run above the 2% target until the economy moves back to full employment or the unemployment level drops to near 3%.
The careful reiteration of the combination of economic analysis and policy framework should be more than sufficient to damp down growing concerns in a corner of the market over the start date for the tapering of those large-scale asset purchases. We do not think that tapering will start until 2022 at the earliest, nor do we think the Fed will make any change in the policy rate until at least 2024.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.