How the Fed hawked up

Goldman with the note:

The FOMC left the funds rate target range unchanged at 0–0.25% at the June meeting, and raised the IOER and RRP rates by 5bp. The median projected path for the policy rate in the Summary of Economic Projections (SEP) increased to show two hikes by 2023, despite almost no change in the individual 2023 core inflation projections. We interpret this to mean that the FOMC sees the 2021 inflation overshoot, which will bring the average inflation rate since the recession began above 2%, as largely sufficient to accomplish its averaging goal, which lowers the inflation bar for eventual rate hikes.

MAIN POINTS:

1. The FOMC left the funds rate target range unchanged at 0–0.25% and left the asset purchase policy unchanged. The statement’s characterization of the current economic situation continued to emphasize the effect of COVID-19 on economic activity and was updated to acknowledge further progress on vaccinations. As we expected, the statement acknowledged that inflation is no longer running below 2%, adjusting the motivation for average inflation targeting from “with inflation running persistently below” to “with inflation having run persistently below”. The FOMC raised both the IOER and RRP rates by 5bp (to 0.15% and 0.05%).

2. The median projected path for the policy rate in the Summary of Economic Projections (SEP) increased to show two hikes by 2023 (vs. no hikes in March), against our expectations for no hikes. Only five of the eighteen FOMC participants expect the first hike to come after 2023 (vs. eleven previously; we had expected ten would continue to do so), while seven of the eighteen participants expect at least one hike in 2022 (vs. four previously; we expected four at this meeting). In our view, the more hawkish projected policy path likely reflects a backward-looking interpretation of average inflation targeting, since inflation will likely have averaged over 2% by the time tapering is complete if the committee looks back to either the announcement of the new framework or the start of the pandemic recession. The median longer run projection for the fed funds rate was unchanged at 2.5%, asexpected.

3. The SEP showed substantially higher median projections in 2021 for GDP growth (+0.5pp to +7.0%), core inflation (+0.8pp to 3.0%), and headline inflation (+1.0pp to3.4%). The median unemployment projection in 2021 was unchanged at 4.5%. Medium-term real activity projections edged higher, with the 2022 unemployment median down a tenth (to 3.8%) and the 2023 GDP growth median up two tenths +2.4%). The 2022 core inflation median rose 0.1pp to 2.1%, but the 2023 projections were surprisingly stable in the context of the hawkish dot plot: the median stayed at2.1%, and only one participant raised his or her individual projection, on net.

Houses and Holes

Comments are hidden for Membership Subscribers only.