Money for Nothing and an Upgraded Outlook – March 22, 2021

One theme that stood out from the Fed’s meeting last week and Fed Chief Powell’s press conference which followed the meeting—the Fed is in no mood to talk about raising interest rates.

Some investors believed the Fed might pivot at this meeting by hinting at an eventual shift in its very easy monetary policy.

Like Powell’s testimony before two Congressional committees late last month, there was no shift in the Fed’s statement or the Powell press conference that followed.

Some Fed officials believe it may be appropriate to slowly begin to lift rates next year (Fed Summary of Economic Projections), but Powell and most central bankers still expect the fed funds rate to remain near zero for the next couple of years. Moreover, Powell said it’s not time to start talking about reducing monthly Fed bond buys of $120 billion.

But that doesn’t mean the outlook isn’t improving.

The Fed now believes the economy will grow by 6.5% this year, up from its December forecast of 4.2%, according to its own Summary of Economic Projections. That’s a substantial increase, and it is an attempt to incorporate the latest stimulus package and vaccine rollout.

We see the same pattern in the Wall Street Journal Economic Forecasting Survey, which reflects substantial upward revisions to growth from December.

The Fed also expects the jobless rate to fall but sees a temporary spurt in inflation.

What makes this different from past cycles is Powell’s insistence that the fed funds rate may not go anywhere until the economy reaches full employment and inflation has risen.

In the past, the Fed has preemptively raised rates in anticipation of higher inflation. It has acted in that manner for decades. The prior pattern seems to be off the table.

The Fed’s goal is to get back to full employment as quickly as possible, and it doesn’t believe the economy will overheat, which could quickly lift inflation and send bond yields much higher.

It’s a grand experiment—super cheap money coupled with massive government aid, but shorter term, the economic outlook has brightened.

Created 2021-03-22 14:48:31