Thursday, January 28th, 2021
“A Brief Overview of the Federal Reserve’s First Meeting of 2021”
The Federal Reserve (‘FOMC’ or ‘the Fed’) had its first meeting of the year this week. As expected, there were no changes to policy, which is largely due to the Fed’s new mandate of average inflation targeting. We would like to take a moment to highlight this, because it gives insight to how the Fed is thinking through inflation – a topic that we have discussed in recent writings.
Average-inflation targeting is a policy that the Fed implemented last year to allow inflation to run above its 2% target in order to make up for recent periods of sub 2% inflation. The Fed deems this necessary after periods of economic weakness. This breaks off from the Fed’s normal course over the past ~30 years, where they instead focused on a fixed target-level of inflation (i.e. if inflation went above their target, they would raise rates – and vice versa when below target). The essential point to draw is that above target inflation was intolerable with former policy, and acceptable under new policy.
Jerome Powell, the Chair of the Federal Reserve, spoke in this week’s meeting about how he is not afraid of inflation getting out of control. Instead, they are more worried about making the same mistakes of the last recovery, which entailed pulling back support for the economy prematurely and allowing projections to overly influence policy. In essence, don’t expect the Fed to hike rates until something actually happens with realized inflation.
A summary of the Fed’s meeting & press conference:
- Jerome Powell focused on getting 2 main points across during his press conference: emphasizing that the economic outlook looks to be improving, and illustrate that despite those improvements, the Fed’s current policies are unaffected.
- Forecasts alone will not be enough of a justification to reduce or alter current accommodative policies, instead they will be more results based, as forecast-based inflation fears failed the FOMC last time, and they expect the same would happen today.
- Progress towards their goals will need to be met at a more rapid pace before tapering begins.
- Tapering is a shift in monetary policy by the Fed that would decrease the amount of bonds it purchased. The taper tantrum, a major negative event that occurred in 2013, was a period where interest rates rose globally as a response to Fed tapering – an event the Fed is seeking to avoid, and believes it has the tools to do so.
- Powell & the Fed appear to be disinterested in the numerous calls from investors to address asset bubbles as a result of their policies, keeping their focus solely on inflation and jobs.
All-in-all, this was an expectedly uneventful meeting. However, it is important to keep an eye on FOMC policy, as their effects on the market can be meaningful. We will be sure to circle back to this topic when the Fed begins making more concrete decisions, or meaningful statements that drive economic activity.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which Investment(s) may be appropriate for you, consult your financial advisor prior to investing. Information is based on sources believed to be reliable, however, their accuracy or completeness cannot be guaranteed. Statements of forecast and trends are for informational purposes and are not guaranteed to occur in the future. There is also no assurance that any investment strategy will assure success or protect against loss.