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January 27, 2021US 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 until substantial further progress has been made toward the Committee's maximum employment and price stability goals. 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. The pace of economic recovery has moderated in recent months due to new round of containment measures. Employment growth has also slowed down with continuous weakness in public-facing sectors. Soft oil prices and weak consumer demand have put a downward pressure on inflation. Reflecting the policy measures in place, financial conditions remain accommodative.
Recent progress on vaccine manufacturing and roll-out will have a significant impact on the path of the recovery. However, the ongoing public health crisis continue to weigh on economic activity, employment, and inflation in the US.
As presented in the December 2020 Monetary Policy Report Projection Materials, the Federal Reserve projects real GDP will decline 2.4% in 2020 followed by growth of 4.2% in 2021, 3.2% in 2022 and 2.4% in 2023. Longer-run annual growth rates are projected to be around 1.8%. Projections for the unemployment rate are 6.7% in 2020, 5.0% in 2021, 4.2% in 2022 and 3.7% in 2023. Inflation rate projections are 1.2% in 2020, 1.78% in 2021, 1.9% in 2022 and 2.0% in 2023. The median Federal funds rate projection is 0.1% through 2023. The longer-run Federal funds rate is estimated as 2.5%.
The Committee noted that it will continue to monitor the economic situation and is prepared 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 March 16/17, 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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