Is the economy better or less-worse?
Weekly Bond Commentary
The Federal Reserve convened last week and, though no one expected rate action, markets looked for additional guidance on the direction of interest rates and any other actions they might take. They got that, but it didn’t clear much up.
As the Fed does quarterly, it released its updated Summary of Economic Projections, this time going out through 2023. Policymakers believe 2020 GDP won’t be as awful as once thought, calling for a contraction of “only” 3.7%. That is still bad, but better than their earlier forecast of a drop of 6.5%. Similarly, they predict the unemployment rate will end 2020 at 7.6%, better than the 9.3% they called for in June. More problematic is that officials fear inflation will stay below their 2% target rate for at least two years, and that GDP will reach 2.5% and the unemployment rate 4% only by year-end 2023, fueled by the federal funds rate effectively anchored at zero through 2023. So, in their eyes, the impact of the coronavirus shutdowns and dislocations could require four years to get the economy back to year-end 2019 levels. The Fed appears to be indicating it will not raise rates until it sees a clear need to counter inflationary pressures, which show no sign of manifesting.
Markets had some indigestion from the meeting. Hopes that the Fed would increase the amount of securities it is buying were dashed, although it indicated it will act more boldly in the future if needed.