FOMC Leaves Rates and Purchases Unchanged, Powell Opines on Inflation

The Fed had its final meeting in the most active year for Central Banking since the Global Financial Crisis. The headline is that Fed members continue to project no upward change in rates for at least 3 years and will continue asset purchases at the same levels for the foreseeable future. In other words, no fireworks. The tone and outcome were nonetheless positive for markets in our view.

Some had speculated that the Fed might engage in further accommodative action like buying longer-dated debt as it did about a decade ago. Chairman Powell responded to questions about why they decided not to do this by explaining that long-term interest rates are already low. He said monetary policy, particularly since we can see through to mass vaccinations, is not the most appropriate or effective tool to respond to short-term economic challenges. He again resolutely implored fiscal authorities to act quickly as, in his view, assistance from them will be the most effective in getting assistance to struggling businesses and families. It is ironic and unfortunate that disputes over the future of lending programs have been thrust directly into that debate. He noted that monetary policy is not a good tool to aid industries that are struggling due to lockdowns and changed consumer behavior from the virus.

The sub-text is a bit more bullish for markets than might meet the eye and may be only apparent to those who have reviewed the Summary of Economic Projections (SEP). The bottom line is that accommodation is the same, and economic projections are more positive, which is good for equities. Of course, Powell also mentioned that his agency is ready on a moment's notice to ratchet up asset purchases if the situation warrants it, i.e., taking longer to get inflation targets and maximum employment than the current SEP would indicate. Despite a lack of further accommodative action, the Fed's economic projections have gotten significantly rosier. The Fed's language also changed from terms implying indefinite support to 'bridging the chasm' until demand can recover. The Fed raised its GDP growth projection and forecast a lower unemployment rate than previously for 2021, reducing projections from 5.5% to 5%.

One particularly bullish item that we wanted to highlight is that Jay Powell specifically said that in addition to the far more accommodative Adjustable Inflation Target framework that the Fed will not be considering price rises that will naturally accompany recovering demand as the beginning of a sustained inflationary cycle. This means the punch bowl will be out later than ever, in Fed speak. The risk of a 2013-style' taper tantrum' seems to be something relegated to the past for the foreseeable future.

Asset purchases continued at a pace of $40 billion a month for MBS and $80 billion a month for Treasuries. The benchmark yield on the 10 year is 0.94% up from 0.90% last week.

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