During its last meeting before the US elections, the Federal Reserve voted to keep short-term interest rates anchored near zero. The Fed also provided specific language about its intent to hold rates low until inflation increases.
According to input from individual members, rates could stay anchored near zero through 2023. In addition, officials addressed a new policy regime in which the Fed will allow inflation to run somewhat above the 2% target rate before hiking rates to control inflation.
The committee now sees a full-year GDP decline of 3.7%, considerably better than the 6.5% drop forecast in June. However, it lowered its 2021 outlook to 4% from 5% and 2022 to 3% from 3.5%. The committee expects 2.5% GDP growth in 2023.
The unemployment rate projection also was brought down, to 7.6% from 9.3%, which was already above the 8.4% jobless rate for August. The committee also marked up its inflation projection for 2020 to 1.2% from 0.8% in June, though it still does not see it hitting the 2% goal until 2023.
Since the start of COVID-19, the Fed has delivered an unprecedented array of policy tools aimed at keeping markets functioning and the economy afloat by means of dozens of lending and liquidity programs that have coincided with a massive rise in stocks and a steadying and in some cases major rise in economic indicators.
This is in turn positive for risk-on strategies.