Fed Still Hasn’t Found What it’s Looking For

Key Points

  • The Fed made no changes to its interest rate or balance sheet policies; but some of the language in its statement was tweaked, reflecting recent hotter inflation data.

  • Underscoring a bit of a hawkish tilt, the FOMC—in its dots plot—signaled they now expect two interest rate increases by the end of 2023.

  • Despite continued progress in the labor market and an increasing pace of inflation, Chairman Jerome Powell reiterated that the Fed will be transparent in signaling when a tapering in asset purchases is to come.

As expected, the Federal Open Market Committee (FOMC) made no formal change to its interest rate or balance sheet policy. In a unanimous decision, it held the target fed funds rate unchanged at 0-0.25%, where it’s been since March 2020, and will continue to purchase $120 billion per month of Treasury and mortgage-backed securities. Regarding tapering its $7 trillion balance sheet, the statement retained the reference substantial further progress (in both its inflation and employment mandates).

The FOMC signaled they now expect two interest rate increases by the end of 2023, a more hawkish projection relative to this past March; and likely explains the initial reaction by markets (yields and the U.S. dollar rose, and stocks fell). The committee’s quarterly projections now show 13 of 18 FOMC officials favoring at least one rate hike by the end of 2023 vs. only seven in March. There are now eleven FOMC officials expecting at least two hikes by the end of that year; while seven expect a move as early as next year—up from four in March. You can see the so-called “dots plot” of these projections below.

In reference to the pandemic, the accompanying FOMC statement had a few key changes relative to the April statement. “The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world” was altered and now reads “progress on the vaccinations has reduced the spread of COVID-19 in the United States.” The statement also emphasized that vaccinations “will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain.”