FOMC minutes: Staff implied a considerably stronger outlook for 2021 relative to the Dec forecast

Author: Adam Button | Category: Central Banks

Highlights of the January 26-27 FOMC meeting

Powell, FOMC
  • Full text of the meeting minutes
  • Staff forecast incorporated effects of Dec stimulus with an assumption of additional fiscal support in the coming months
  • Boost to growth from the reduction in social distancing assumed to be largely completed by the end of 2021
  • Staff forecast sees 'considerable further decline in unemployment rate'
  • With monetary policy assumed to remain accommodative, inflation was projected to moderately overshoot 2% for some time in the years beyond 2023.
  • Labor market conditions deteriorated, on balance, in December
  • Consumer price inflation through November remained considerably lower than the rates seen in early 2020
  • Available indicators pointed to a strong increase in investment in equipment and intangibles in the fourth quarter of 2020
  • Owing in part to the proximity of interest rates to the effective lower bound, the Committee judges that downward risks to employment and inflation have increased.
  • Evolving outlooks for the path of the virus and for fiscal policy were the main drivers of financial markets over the intermeeting period.
  • The emergence of a narrow Democratic majority in the Senate bolstered investor expectations for additional fiscal stimulus
  • Overall financial conditions eased further, on net, as the recent rally in risk assets continued
  • Desk survey results indicated that a majority of market participants anticipated that the pace of net asset purchases would remain stable for the remainder of the year and slow around the first quarter of 2022
  • In the relatively near term, a number of participants suggested that there could be increases in the prices of some goods whose production has been subject to supply chain constraints, or soon could be; others anticipated that a possibly abrupt return to normal levels of activity could result in one-time increases in certain prices
  • Participants generally viewed the risks to the outlook for inflation as having become more balanced than was the case over most of 2020
  • With regard to upside risks, some participants pointed to the possibility that fiscal policy could turn out to be more expansionary than anticipated, that households could display greater willingness to spend out of accumulated savings than expected, or that widespread vaccinations and easing of social distancing could result in a more rapid boost to spending and employment than anticipated.
Here is what the FOMC minutes say about the path of inflation, which is a particular market focus at the moment:

The 12‑month changes in total and core PCE prices in coming months were projected to briefly move above 2 percent in the second quarter of 2021 as the unusually low observations from the spring of 2020 drop out of the 12-month calculation. Following these swings, inflation was expected to finish the year at just below 2 percent. Thereafter, inflation was projected to gradually edge up to 2 percent by the end of the medium term as labor and product markets tightened. With monetary policy assumed to remain accommodative, inflation was projected to moderately overshoot 2 percent for some time in the years beyond 2023.
One thing that's notable in the minutes is the lack of any alarm or concern about inflation aside from some nods towards more fiscal support than anticipated or a greater willingness to spend.

There is a repeated emphasis on highlighting temporary inflation bumps in Fed communication, something Fed members have been doing since then.

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