Near-zero rates here to stay; Dot plot expects no rate changes for 3 years

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The Summary of Economic Projections, released Wednesday, shows Federal Open Market Committee members expect the fed funds rate target to remain at zero lower bound through next year, with all but two participants expecting no rate hikes in 2022 as well.

One member expects rates to jump a full point in 2022, while the other outlier sees rates climbing 25 basis points in 2022. Over the longer run, most members see rates at 2.5%, with others ranging from 2.0% to 3.0%.

And in his post-meeting press conference, Fed Chair Jerome Powell said, “We are not even thinking about thinking about raising rates.”

The FOMC announced on Wednesday that they are holding rates at the current lower bound range.

As for unemployment, the SEP projects a 9.3% rate this year, 6.5% next year and 5.5% in 2022. Powell has often attached little importance to longer-term projections, suggesting much could change in the interim, and he again warned about reading too much into these numbers.

The SEP suggests GDP will fall 6.5% this year, but rise 5.0% next year and 3.5% in 2022.

As expected, FOMC members voted to maintain the target range for the federal funds rate at zero to 0.25%.

“The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term,” the post-meeting statement said.

Bruce Monrad, chairman and portfolio manager at Northeast Investors Trust, said the statement shows the Fed reaffirmed its “goal of keeping financial market conditions easy.” He also noted, that as expected, it “did not adopt a yield curve control program, at least not yet, to further help anchor interest rates.”

Powell mentioned forward guidance and asset purchases, and said the panel discussed, and will continue to talk about yield curve control, which is widely expected to be implemented late this year.

With a vow to buy Treasuries at least at current level, Christian Scherrmann, U.S. economist at DWS Group, noted the Fed maintained its flexibility to react to an uncertain future.

“From the updated Summary of Economic Projection we learn that a recovery, reflected in unemployment rate forecasts, is judged to take until 2022 while inflation is judged to remain below the 2% target over the whole forecast horizon,” Scherrmann said.

Bryce Doty, senior vice president and senior portfolio manager at Sit Fixed Income Advisors, LLC, said, despite last Friday’s stunning jobs data, the economy is still a long way from being out of the woods and the Fed clearly acknowledged that with today's announcement.

The Fed plans to buy everything but stocks, he said. “Investors should like the Fed’s message and we expect both credit and equity markets to continue to do well over at least the next couple of weeks.”

"Fiscal and monetary stimulus programs so far are about $10 trillion in their combined potential effect — about 50% of the size of the U.S. economy, with additional fiscal stimulus expected and Fed officials reiterating at every opportunity that it will do whatever it takes to mitigate the economic downturn and support the recovery," said Steven Skancke, chief economic advisor at Keel Point and former White House National Security Council staff member.

The consumer price index dipped 0.1% in May after a 0.8% decline in April, according to the Labor Department.

Economists polled by IFR expected it would be unchanged.

In the past year, it has nudged up just 0.1%. Economists expected a 0.2% gain.

Core CPI also declined 0.1% in May, marking the first time it fell three months in a row. In April it dropped 0.4%.

Economists expected a flat read.

Core CPI in the last year is up 1.2%, compared to the 1.3% economists anticipated.

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Monetary policy FOMC Federal Reserve Coronavirus Jerome Powell Interest rates Economic indicators