The Daily Update: Steady as she goes

Steady as she goes was the message from the FOMC yesterday. Although the statement was more upbeat, the message was of patience. The dot plot was unchanged through 2023, so no hikes in the medium term, looking at stronger near-term growth forecast and a continuing dovish theme going forward. The Fed Chair described the economic outlook as being broadly consistent with the Fed’s recent forecasts, whilst noting that the policy guidance remained largely intact. The FOMC did upgrade its economic outlook whilst predicting a brief spike in prices, with inflation temporarily touching 2.2% later this year before slowing again to 2%. GDP forecast for 2021 rose from 4.2% to 6.5%.

In the press conference, Powell reiterated a lot of the points he has made recently expressing optimism on the labour market and GDP, but also noting that the employment situation has a ‘long way’ to go before it is recovered. He continued to sound sceptical about the trend in inflation suddenly picking up. He said ‘The path of the economy continues to depend significantly on the course of the virus and the measures undertaken to control its spread. Since January, the number of new cases, hospitalizations, and deaths has fallen. Ongoing vaccinations offer hope to a return to more normal conditions later this year’. ‘The economic recovery remains uneven and far from complete, and the path ahead remains uncertain. Following the moderation in the pace of the recovery that began toward the end of last year, indicators of economic activity and employment have turned up recently. Although the sectors of the economy most adversely affected by the resurgence of the virus and by greater social distancing remain weak…. Overall, inflation remains below our 2% longer run objective. Over the next few months, 12-month measures of inflation will move up as the very low readings from March and April of last year fall out of the calculation. Beyond these base effects, we could also see upward pressure on prices if spending rebounds quickly as the economy continues to reopen…We expect to maintain and accommodate a stance of monetary policy until these employment and inflation outcomes are achieved’.