WASHINGTON–Minutes released from the January meeting of the Federal Reserve’s Open Market Committee reveal the Fed has a “considerably stronger outlook” for economic activity in 2021 than it did when it previously met in December of 2020. But while it sees a likelihood of higher inflation, it does not anticipate raising rates in the near future.
The rosier outlook is the result of an assumption the federal government will provide an “additional sizable tranche of fiscal support” and that widespread vaccination will allow for an easing in social distancing in 2021.
Members of the board were told by Fed staff that GDP growth was expected to “step down” over the remainder of the medium term, but even so real GDP growth would outpace that of potential over this period, leading to a considerable further decline in the unemployment rate.
During its January meeting the FOMC opted to leave rates untouched at between 0-.25%.
The Fed is projecting 2021 inflation will fall just below 2%--its traditional target--and is projected to “moderately overshoot 2% for some time in the years beyond 2023.”
Other Data Points Discussed
Other points included in the Fed Minutes:
• In commenting on recent data for household spending, most FOMC participants discussed the composition of expenditures, with strong spending on many goods, especially durables, and weakness in spending on some services, especially in travel and in leisure and hospitality.
• Most participants noted that the economic downturn had not fallen equally on all Americans and that those least able to shoulder the burden—in particular, lower-income and Black and Hispanic households—had been the hardest hit by the pandemic. Many participants stressed that sustained support from fiscal policy would help address the hardships faced by these groups and that monetary policy could also help by promoting the economy's return to maximum employment and price stability.
• Strength was seen in business equipment investment and manufacturing.
• Several participants noted the increase in agricultural crop prices over 2020 and the associated improvement in farm revenues.
• FOMC participants judged that the current low level of labor force participation likely reflected a number of factors, including health concerns and additional childcare responsibilities. Over the medium term, participants expected strong growth in employment, driven by continued progress on vaccinations and an associated rebound of economic activity and of consumer and business confidence, as well as accommodative fiscal and monetary policy.
• Outside of near-term fluctuations, participants generally anticipated that inflation would move up along a trajectory consistent with achieving the Committee's objectives over time.
• The FOMC said it believes its current outcome-based guidance for both the federal funds rate and balance sheet appeared to be well understood by the public.
Relatively ‘Little Change’
“Expectations for the path of the target federal funds rate over the next several years, as implied by interest rate futures and by the Desk Survey of Primary Dealers and Survey of Market Participants, were relatively little changed from December,” the FOMC said. “The stability in near-term policy rate expectations amid an improving growth outlook appeared consistent with the Committee's new framework and forward interest rate guidance.”
The full Fed Minutes can be found here.