More of the Same From the Fed in Latest Meeting
We still expect accommodative lean.
In its latest statement on Jan. 27, the Federal Open Market Committee unsurprisingly held the federal-funds rate at 0.0%-0.25%. Though some of the voting members changed because of the new year, the vote was still unanimous. The Federal Reserve continues to signal that it will remain very accommodative for some time and that it plans to hold off on any less accommodative measures until the recovery in the labor market and the economy, along with a recovery in inflation, is essentially completed. We anticipate that the FOMC will be in a holding pattern for some time, with the meetings and releases likely to be relatively mundane for a while.
The Fed plans to continue to increase its holdings of Treasuries by at least $80 billion a month and its holdings of agency mortgage-backed securities by at least $40 billion a month, which has been the case since June 2020. There were some slight updates to the language of the release. The Fed highlighted that the economic recovery has begun to stall out, whereas in the last release, its emphasis on the progress of the recovery was more prevalent. The Fed also took out certain language related to timing, taking out “in the near term” and “over the medium term” when describing the effects of COVID-19 on inflation and the economic outlook, respectively. We interpret this as the Fed removing language that potentially limits the expected timeline regarding the pandemic’s effects on the economy and inflation. In other words, there is no expected time limit for how long inflation or the economy could be weighed down, and therefore the current accommodative policy is not limited to the near or medium term. This is subtly more dovish, in our view, but again, the differences are admittedly quite slight.
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