By Tom Burnett CFA
On September 16, 2020, the Federal Reserve Open Market Committee released its monthly view on economic policy. The Statement was not unanimous, but the two dissenting members gave complex statements and neither one opposed the current low interest rate policies.
The Fed is concerned about weak growth, high unemployment and continued low inflationary expectations. The Statement now suggests that near-zero short-term rates may be required until the end of 2021 into early 2022. The Statement also recommends continued fiscal expansion policies until the general economy has recovered from the impact of the Covid-19 pandemic.
In addition, the Fed issued its revised Economic Projection for the next two years. Real GDP is now expected to shrink by 3.7% in 2020. The latest projection compares to a decline of 6.5% in the June release. For 2021, the Fed sees a GDP recovering growth rate of 4.0%. Unemployment is now seen to average 7.6% this year, recovering to a 5.5% average rate for 2021. Inflation is now expected to average 1.2% this year, compared to an estimate of 0.8% in the June forecast. Next year, the Fed now expects inflation to average 1.7%, but the target rate of 2.0% is not expected to surface before 2023.
On balance, the Fed Statement contained few surprises and short-term rates are expected remain for the next 12 to 18 months
Tom Burnett CFA is Director of Research