Fed Expects Stronger Economic Recovery To Come
During the most recent Federal Open Markets Committee meeting, the Federal Reserve reiterated its plan to maintain current economic policy until fiscal and economic goals are met.
The minutes from the Federal Reserve’s March Federal Open Markets Committee (FOMC) meeting showed there is an expectation for a stronger economic recovery in the months and years ahead.
The FOMC voted in March to continue to hold interest rates in a range of 0 percent to 0.25 percent. In the minutes, the Fed pointed out that market participants even expect a higher and faster path to raising the federal funds rate due to an expected stronger recovery.
“Market participants highlighted an improving economic outlook, bolstered by passage of the American Rescue Plan and progress on vaccinations, as underlying the increase in yields,” the minutes stated. “Rates implied by interest rate futures maturing over the next several years rose notably over the intermeeting period, reportedly reflecting a reassessment by market participants of the expected path of the target range for the federal funds rate.”
The market now expects the Fed to once again raise interest rates in the first quarter of 2023, and the implied target rate at the end of 2023 rose around 50 basis points.
However, responses to the Open Market Desk surveys suggested more modest changes to policy rate expectations. The probability-weighted mean survey expectation for the target rate at the end of 2023 rose only around five basis points. The Fed stated that this expectation fell more in line with its plan for rates.
“Contacts noted that these expectations have been held steady by policymaker communications emphasizing both the need to see realized progress toward the committee’s goals and the intent to communicate well in advance of the time when progress could be judged substantial enough to warrant a change in the pace of purchases,” the minutes stated.
While the Fed was positive in its outlook for economic recovery and what it has seen so far, it stated it would like to see more of its goals met before it considers raising rates again.
“The economic recovery remains uneven and far from complete, and the path ahead remains uncertain,” Fed Chairman Jerome Powell said after the March meeting. “Monetary policy will continue to deliver powerful support to the economy until the recovery is complete.”
During its meeting, the FOMC noted that the economy has seen significant recovery over the past several months, including in GDP, employment, wages and more, however it has yet to reach pre-pandemic levels.
The economy has also seen several other positive developments, such as rising mortgage interest rates and a new low in forbearance requests.
But the Fed said it won’t raise interest rates until the labor market reaches maximum employment, inflation reaches 2 percent and is forecast to moderately exceed 2 percent for some time.