FOMC Reaction - December Update

Fed moves to less accommodation, consistent with investors’ expectations.
At its meeting today the FOMC voted unanimously to maintain the Federal Funds rate at 0-0.25% and to increase the pace of tapering. In its summary of economic projections, the Fed updated their projections to show slightly slower GDP growth, a lower unemployment rate, and slightly faster inflation than projected in September. The statement noted strength in the pace of job gains as well as risks from new variants of the virus.

The Summary of Economic Projections included increases to the median Fed Funds Target Rate forecast:
By year-end 2022: from 0.25% to 0.875%.
By year-end 2023: from 1.00% to 1.625%.

2022 Year End Dot Plot Evolution:

2023 Year End Dot Plot Evolution:

Messaging at the press conference:
At the press conference, Chair Powell focused on the rapid improvement in the labor market, noting strength in job gains and wage growth. Chair Powell focused on the continued impacts of the pandemic on the economy including lower labor supply, disrupted supply chains, and inflation. Chair Powell noted that inflation has spread to a broader set of prices, not just those most-dislocated by the pandemic.

Market reaction:
The market reaction was mildly positive for risk assets. Bond yields were mostly stable, with rates up a few basis points across the curve. After the announcement there was a slight fall in the dollar, and slight increases in gold and oil.

Our takeaways:
The Fed moved their projections & communications basically to where the market had anticipated. Right now, the projection is for tapering to conclude around March or April. The projection for 2022 is for 0.25% policy rate hikes in June, September, and December. These moves are consistent with the strong pace of recovery the economy has been experiencing.