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December 16, 2020US MONETARY POLICY At its scheduled Federal Open Market Committee (FOMC) meeting, the Federal Reserve announced that it would keep the target range for the federal funds rate at 0 to 0.25 per cent. The Committee expects to maintain this target rate until labour market conditions are at levels that is consistent with the Committee’s assessment of maximum employment and inflation has risen to 2 per cent and is on track to moderately exceed 2 per cent for a period so that inflation averages 2 per cent over time.
In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month. The Federal Reserve expects to continue this until substantial progress has been made towards the goals of maximum employment and price stability. This is expected to provide support to the flow of credit to households and businesses and ensure smooth functioning of the financial markets.
The COVID-19 pandemic had an unprecedented impact both on the US economy and globally. Economic activity started to pick up with the easing of containment measures but remains below pre-pandemic levels. The recent uptick in coronavirus cases in the US and other economies are posing a risk to the recovery as governments start implementing a second round of lockdown measures. Weak consumer demand combined with low oil prices are holding down consumer price inflation. Reflecting the policy stimulus, financial conditions remain accommodative.
The Federal Reserve projects real GDP will decline 2.4 per cent in 2020 followed by growth of 4.2 per cent in 2021, 3.2 per cent in 2022 and 2.4 per cent in 2023. Longer-run annual growth rates are projected to be around 1.8 per cent. Federal Reserve’s December projections for real GDP represents an upgrade from their September projections from 2020 to 2022.
Projections for the unemployment rate are 6.7 per cent in 2020, 5.0 per cent in 2021 and 4.2 per cent in 2022. Inflation rate projections are 1.2 per cent in 2020, 1.8 per cent in 2021 and 1.9 per cent in 2022. The median Federal funds rate projection is 0.1 per cent through 2023. The longer-run Federal funds rate is estimated as 2.5 per cent.
The Committee noted that it will continue to monitor the economic situation and is prepares to adjust the monetary policy as needed to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The next scheduled FOCM meeting will be held on January 26/27, 2021. The Federal Reserve will provide an updated summary of economic projections at that meeting as well.
Source: US Federal Reserve, FOMC Statement
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