By Tom Burnett CFA
On June 16, 2021 the Federal Reserve Open Market Committee released its monthly statement on interest rate policies and economic projections. Importantly, the Fed did not change its goal of holding the fed funds rate to a range of 0 to 0.25%. In addition, the Fed disclosed that it will continue its monthly purchases of $120 billion of bonds, $80 billion of Treasuries and $40 billion mortgage-backed securities. The purchases will end only when the economy has recovered to pre-Covid levels and employment has reached the 155 million level, some 8 million jobs away.
The Fed has been busy during the Covid outbreak and the measures imposed to counter it. The Fed balance sheet has grown to $8 trillion from $4.4 trillion prior to the Covid attack in early 2020. The M2 money supply has grown by 18% from a year ago to a record high of $20.3 trillion, nearly equal to the nation’s annual GDP figure.
The Fed also revised its economic projections from the March 2021 forecasts. It now sees GDP growth this year at 7.0% up from an earlier forecast of 6.5%. Growth in 2022 remains at a projection of 3.3%. Inflation is now expected to peak at 3.4% this year, above the March forecast of 2.4%.
The interest rate projections remain at 0.1% average for 2021 and 2022, but the 2023 forecast is now 0.6%, up from 0.1 % in the March forecast. The market did not like that increased projection and stocks sold off by nearly one percent when the Fed statement was released. The rate on the ten-year Treasury rose from 1.48% to 1.57% on the news of the higher forecast for 2023.
The next FOMC meeting will take place on July 27-28 with a Statement released on July 28, 2021.
Tom Burnett CFA is Director of Research