Chief Economist Scott Brown discusses current economic conditions.
No surprise, the Federal Open Market Committee left short-term interest rates unchanged and did not alter its monthly pace of asset purchases. Financial market participants did react to a shift in the dot plot and some Fed observers are already speculating that the central bank may have lost its nerve regarding the new policy framework. A shift forward in the expected lift-off of rates should have been expected, given the outlook for growth and inflation. At the same time, the economic outlook is highly uncertain. The correct answer regarding questions of Fed policy remains: “it depends.”
Fed officials have mixed feelings about the dot plot, most of them (including Chair Powell) don’t like it. It provides useful information, but is subject to misinterpretation. The dot plot shows individual projections of the appropriate year-end federal funds rate target for each of the 18 senior Fed officials. In March, most (11 of 18) did not foresee an increase in short-term interest rates through 2023. As of the June meeting, a majority (13 of 18) expect a hike by the end of 2023 and some (7 of 18) see an increase in 2022 (none see a hike this year). There was a wide range of expectations for the federal funds target rate at the end of 2023 (some as high as 1.625%). Bear in mind that not all of the dots vote on policy and the district bank presidents tend to be more hawkish. In his press conference, Powell said that the dots are “individual projects, not a Committee forecast, and not a plan.” Officials are not debating when to raise rates, “because discussing lift-off now would be highly premature – it wouldn’t make any sense.” Yet, that is not what many market participants nor many in the financial press believe. Headlines suggesting that the Fed is forecasting two rate increases in 2023 are absurd. Take it from Chairman Powell, “dots need to be taken with a big grain of salt.”
June 16 Summary of Economic Projections (source: Federal Reserve)
In its Summary of Economic Projects, Fed officials increased their projections for GDP growth for this year. At 3.4% (4Q21/4Q20), inflation is expected to be higher than what was expected in March (+2.4%). Yet, inflation is still expected to moderate in 2022.