Fed likely to pen rosier forecasts, but no policy shift expected
Send a link to a friend
[March 15, 2021] By
Ann Saphir
(Reuters) - Federal Reserve policymakers
are expected this week to forecast that the U.S. economy will grow in
2021 at the fastest rate in decades, with unemployment falling and
inflation rising, as the COVID-19 vaccination campaign gathers pace and
a $1.9 trillion relief package washes through to households.
But investors who expect rosier projections to translate to any change
in monetary policy when the U.S. central bank's Federal Open Market
Committee ends its two-day meeting on Wednesday will likely be
disappointed.
"The FOMC will not validate market expectations of an earlier and faster
liftoff and will reiterate that its policy stance will remain very
dovish for the foreseeable future," Cornerstone Macro economist Roberto
Perli told clients in a note last week.
"Bottom line, don't expect the FOMC's tone to change much."
The Fed has kept interest rates pinned near zero for the past year, and
has promised to keep them there until the economy reaches full
employment, and inflation has hit 2% and is on track to exceed that pace
for some time.
That's a higher bar for raising rates than it set in the past. With
inflation falling short of the Fed's target in recent years even when
unemployment was very low, the central bank flipped its policy approach
last year, pledging under a new framework to no longer act preemptively
to head off inflation, and to aim for broad-based and "inclusive" full
employment.
It is also buying $120 billion in Treasuries and mortgage-backed
securities and has said it will keep doing so until it sees "substantial
further progress" toward its full employment and inflation goals.
In recent weeks, Fed Chair Powell has said he expects faster economic
growth this year to push unemployment down and prices up as newly
vaccinated people dine out, book travel and undertake other
long-deferred activities.
But Powell doesn't expect price increases driven by the coming spending
surge to be long-lasting or even terribly big, and plans to be "patient"
when it comes to changing the Fed's bond-buying program.
Powell and other Fed officials have said they believe the current 6.2%
unemployment rate vastly understates the weakness of the labor market in
part because it does not take into account the millions of people who
have stopped looking for jobs.
While fresh Fed forecasts will likely pencil in a fall in unemployment
this year to well below the 5% projected three months ago, that decline
could mask both a large number of workers on the sidelines and higher
unemployment among groups hardest hit by the pandemic-triggered
recession, including Blacks, Latinos and women.
"They've made it very clear that they don't think 'substantial further
progress' has been made yet and think it will take some time to do so,"
said Zachary Griffiths, a macro strategist for Wells Fargo Securities.
LOOKING TOWARD JUNE?
Since the U.S. central bank last provided economic forecasts in
December, Congress has passed two new aid packages totaling about $2.8
trillion - the equivalent of about 15% of annual U.S. economic output.
[to top of second column] |
Federal Reserve Chair Jerome Powell holds a news conference
following the Federal Open Market Committee meeting in Washington,
U.S., December 11, 2019. REUTERS/Joshua Roberts
Given that expected influx of cash, a COVID-19 vaccination program recently
averaging more than 2 million shots a day, and increasing numbers of state
governors relaxing restrictions on activity, Fed officials are widely expected
to bump up their forecasts for economic growth this year to perhaps 6% or more,
from the 4.2% projected in December. Anything over 5% would be the fastest
annual pace since 1984, when the economy grew 7.2%.
A few analysts say that will mean a majority of the Fed's 18 policymakers will
forecast an interest rate hike by 2023.
The so-called "dot plot" of rate hike expectations issued in December showed
just five expecting rates to rise by then.
It's a "close call," Nomura economists wrote in a note last week, but with
unemployment expected to fall and Fed policymakers likely to see inflation
rising to 2.1% in 2023, "many participants will view the Fed's three criteria
for liftoff as met by mid-2023."
Traders in interest rate futures are pricing in a much more aggressive scenario,
with liftoff occurring in late 2022 and two additional quarter-percentage-point
hikes in 2023.
Longer-term borrowing costs have also risen, with 10-year Treasury yields now
around 1.6%, up from less than 1% just three months ago, as investors price in
stronger economic growth and, perhaps, higher inflation. But unlike the European
Central Bank, which last week said it would accelerate its bond purchases to
keep rising yields from derailing the economic recovery there, the Fed has
signaled little discomfort with the market moves.
"I do worry that (new Fed forecasts point to) a rate hike in 2023 and
considerably stronger growth this year and higher inflation this year and the
markets misunderstand and say 'they are going to bail on their forward guidance
and they are going to raise rates soon,'" said William English, a Yale School of
Management professor and former head of the Fed's monetary affairs division. The
Fed would have to "get in front of that," he added.
Still, most analysts expect the majority of forecasts to continue to signal no
rate hikes through the end of 2023.
The stakes are high, said Tim Duy, an economics professor at the University of
Oregon, as Fed policymakers aim "to anchor the credibility of their profoundly
changed framework against a coming cascade of strong growth and potentially
higher inflation."
But sticking to a dovish tone now may ultimately raises the odds of bringing the
current recession, and the current period of super-easy Fed policy, to an
earlier end.
As the year progresses, "interest rate hike expectations will be increasingly
difficult for the Fed to downplay," says James Knightley, an economist at ING.
But that isn't necessarily a bad thing if, say by June, a majority of Fed
policymakers do see a 2023 liftoff, he said. "Getting that normalization earlier
would be success for the Fed."
(Additional reporting by Jonnelle Marte and Howard Schneider; Editing by Dan
Burns and Paul Simao)
[© 2021 Thomson Reuters. All rights
reserved.] Copyright 2021 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.
Thompson Reuters is solely responsible for this content. |