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The Federal Reserve's June Meeting Gives Hope for a V-Shaped Recovery -- Here's Why

By Matthew Frankel, CFP® – Updated Jun 10, 2020 at 5:24PM

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Here's what the FOMC said and did in its latest meeting that investors need to know.

The Federal Open Markets Committee, the policy-making arm of the Federal Reserve, just met for the first time since the U.S. economy started to reopen and for the first time since the blowout May jobs report that sent the stock market soaring.

While most economists didn't expect any change to interest rates, many were quite curious to get a look at the FOMC's latest economic projections, which we haven't seen since late 2019. With that in mind, here's a rundown of the important takeaways from the Fed meeting that investors need to know.

Entrance to a Federal Reserve building.

Image source: Getty Images.

Interest rates didn't change

As was widely expected, the FOMC decided to keep the federal funds rate at a target rate of 0% to 0.25%. The decision was unanimous among the 10 voting participants.

In its closely watched statement, the FOMC said that it is committed to using all of the tools at its disposal to support the economy. The statement said that 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."

One somewhat surprising part of the FOMC statement was that it planned to continue its bond buying (quantitative easing) program "at least at the current pace." The Fed had tapered its bond purchases recently, so this could be a relief to investors who may have expected the slowdown to continue.

The economic projections -- the big story

The regularly scheduled March FOMC meeting was cancelled, so it has now been six months since we've received economic projections from the Federal Reserve Board members; these are also the first projections since the COVID-19 outbreak began.

  • On the GDP front, the Fed sees a decline of 6.5% in 2020, but a sharp recovery afterward, with 5% and 3.5% GDP growth in 2021 and 2022, respectively.
  • The Fed expects the unemployment rate to decline from 13.3% currently to 9.3% by the end of 2020, indicating a strong economic recovery. By the end of 2021, unemployment is expected to fall to 6.5%, and continue improving to 5.5% by the end of 2022. This is significantly better than most experts had been projecting.
  • Inflation was perhaps the least affected projection, with 0.8% inflation expected this year, and 1.6% and 1.7% over the next two years. Keep in mind that the Fed's inflation target is 2% (which it reiterated in this meeting's statement), so this also supports a prolonged low-rate environment.

What is the dot plot telling us?

Along with its economic projections, the FOMC also released an updated version of its so-called dot plot, which shows where members see interest rates heading in the future.

In a nutshell, the FOMC sees interest rates remaining at near-zero for the foreseeable future. All members see the federal funds rate remaining at the current 0% to 0.25% range through the end of 2021, and all but two members see the near-zero rates lasting through the end of 2022.

The Foolish bottom line

In a nutshell, the Fed gave stock investors what they were looking for. Rates will remain low for the foreseeable future, economic projections for GDP and unemployment both support the possibility of a V-shaped recovery, and the Fed's statement reiterated that the central bank will do whatever is necessary to support the recovery.

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