As widely expected, the Fed’s new growth forecasts were a major uplift to December’s stale predictions, reflecting recent improvements in US macro momentum, the new administration’s fiscal stimulus and vaccine-boosted reopening trends. Real GDP forecasts of 6.5%, 3.3% and 2.2% for 2021, 2022 and 2023 and Core PCE forecasts of at 2.2%, 2.0% and 2.1% were typically quite close to consensus expectations.
What was most interesting here was that, despite these forecasts and the Fed’s projected decline in the unemployment rate from over 6% today to 3.5% in 2023, the consensus view from Fed governors is that they expect to keep interest rates on hold throughout 2023. While bond markets can take comfort from the Fed delivering on its promise to go slowly with rate hikes, despite inflation creeping above the 2% target, the monetary tide is nevertheless turning. Whereas, back in December, only five of 18 Fed officials predicted higher rates in 2023, seven now expect a rate hike in that year and a third of the committee expects that more than one will be needed. Four participants now project hikes for 2022, compared to just one in December.
The Fed delivered a fairly dovish message to the markets today, but the big debates have been deferred not decided. While it is not hard for the Fed to remain patient, while projecting inflation bouncing around target over the forecast horizon, the pressure to tighten policy is likely to intensify if the US recovery accelerates into the summer, as everyone expects. Many of the questions that have been avoided today will linger over the months ahead and may well have become more urgent by the June FOMC. By then, the Fed might be prepared to take the first decisive step away from the current super-accommodative monetary stance by indicating when it will start to taper QE. If macro momentum continues to build, it might also be confirming market expectations of rate hikes in 2023 at that meeting. The June FOMC could be a more challenging meeting for Chairman Powell than today’s turned out to be.