Fed Doubles Down on Guidance; Improved Econ Projections

Vito J. Racanelli

The Fed met this week. And to summarize, it doubled down on its commitment to keep rates low deep into the economic recovery and will maintain asset purchases at least at their current level. Not surprisingly, coveted details on its new average inflation targeting regime were few and far between.

But even when nothing new is really said during an FOMC conference, the reporters covering the Fed usually put on a decent show. And if I had to give them a grade on their questions during Wednesday’s press conference it would have to be an “A”.

Reporters pressed the Fed for more information on several of the more opaque points of its new policy regime. Questions included what letting inflation run “moderately” above 2% means, what time frame the Fed is referring to when is says average inflation “over time” and perhaps most importantly, just how committed the Fed is to achieving inflation that actually averages 2%.

As expected, most questions were met with a non-response from Chair Powell, and in some cases, a comical non-response. For instance, when pressed about what letting inflation run “moderately” above 2% means, Chair Powell did indeed use the word “moderate” several times in his response.

Perhaps the most important takeaway from the meeting were the Fed’s updated economic projections. Since June they improved modestly, to say the least. The projection for the unemployment rate in 2020, while still elevated, now stands at 7.6%; down close to 2% from the June estimate of 9.3%.

And interestingly enough, while the Fed raised its projections, it still does not see inflation budging above 2% until at least 2023. If this is indeed the case, it could take quite some time for the Fed to actually bring average inflation, however you would like to define it, back to 2%. Especially given its limited range of tools.

With rates at their effective lower bound (I don’t see the Fed venturing into the brave new world of negative rates anytime soon) and strong forward guidance extended pretty much through 2023, all eyes are now on the balance sheet.

The Fed indicated that its purchases of Treasury and mortgage backed securities will continue at at least the current pace of $80B worth of treasury and $40B of mortgage backed securities per month over the coming months. And if these levels are not bringing us to the promised land of 2% average inflation, I wouldn’t be surprised if we see an increase.

The yield on the benchmark 10-year U.S. Treasury is 0.70% up from 0.67% last week.

Next FOMC meeting is Nov. 4-5. No action expected.

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Vito J. Racanelli
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