The FOMC observed the economy is improving, but left it at that.
The Federal Reserve did not change monetary policy today, and made only slight shifts to its rate projections. The Federal Open Market Committee (FOMC) statement noted that indicators of economic activity and employment have turned up recently, though the sectors most affected by the pandemic remain weak. In the updated Summary of Economic Projections, participants took a more optimistic view of economic growth, with the median projection for 2021 GDP boosted to 6.5% from the 4.2% estimate in December. They also raised inflation expectations a notch, pushing estimates for core PCE inflation above 2% at the end of this year.
Despite these positives, policymakers' median projection for the fed funds target range remains at 0-0.25% through 2023, the level at which it has sat since the emergency actions last March. But the detail of the “dot plot” indicated that more participants viewed a rate hike as being possible in 2022 or 2023. That’s a slight, and welcome, shift forward from the projections in December.
The FOMC did not alter its administered rates to alleviate pressures at the front end of the yield curve, leaving the rate on the reverse repo facility at zero and the interest on excess reserves at 10 basis points. But it did raise the counterparty limit on usage of the reverse repo facility from $30 billion to $80 billion. With usage of the facility currently at minimum levels, this change is thought to be in anticipation of additional demand for short-term investments in the coming weeks.
During the press conference, Chair Powell said the Fed’s current asset purchase program remains in the right place, and had no concern about the backup in interest rates out the yield curve. He emphasized that substantial progress must be made toward the Fed’s objectives and that the transient inflation expected to develop in upcoming months would not prompt a rate hike. When asked about the impending expiration of the temporary exemption of Treasuries and reserves from the Supplemental Leverage Ratio—a development that markets are watching closely—Powell indicated the Fed likely will announce something in the coming days.