The Federal Open Markets Committee, the policy-making arm of the Federal Reserve, just announced its interest rate decision and economic projections from its March meeting.
While virtually all experts expected the Fed to keep the benchmark federal funds rate at near-zero levels, the big question mark going into this meeting was FOMC's latest economic projections. These show whether the committee's members think interest rates and inflation are going to rise in the next few years, and if so, when and by how much. And we just got our answers.
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Interest rates didn't change
Here's the part that isn't a surprise. 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.
There are few documents anywhere in finance that are more closely dissected than the FOMC's statement that is released alongside each interest rate decision. And while there were few changes made to the statement compared with the one issued in January, there were a couple of notable edits.
First, the Fed acknowledged in the statement that the pace of the economic recovery has turned upward in recent months, whereas the January statement said that the pace had "moderated." And second, the Fed specifically called out that "inflation continues to run below 2%."
The Fed's projections are the real story here
Bond yields have been rising rapidly over the past month or so. Without getting too technical, this is a big reason why highly valued tech stocks have been under pressure lately. One of the reasons is that investors are worried that inflation is set to rise as the economy starts getting back to normal, which could cause the Fed to raise rates more quickly and sharply than expected. Well, we finally got our look at where the policymakers see gross domestic product (GDP) growth, unemployment, inflation, and interest rates going over the next few years:
- The Fed sees 6.5% GDP growth in 2021, then cooling down to 3.3% and 2.2% in 2022 and 2023, respectively.
- The Fed expects the unemployment rate to end 2021 at 4.5%, which is pretty impressive considering it was over 13% at the height of the pandemic. It then sees unemployment falling even further to 3.9% in 2022 and 3.5% in 2023.
- The Fed sees overall inflation of 2.4% in 2021, which is slightly above the stated 2% target but not exactly a cause for concern. And it's the projections for 2% and 2.1% inflation over the next two years that are helping investors breathe a sigh of relief.
Now for interest rates. The FOMC also releases its "dot plot," which shows where each of its members (anonymously) sees the federal funds rate at the end of 2021, 2022, and 2023.
- For 2021, not one FOMC participant thinks rates should rise. Everyone involved believes the current 0% to 0.25% target range is appropriate.
- In 2022, there are a few (four out of 18) who think we should have a rate hike or two, but the overwhelming consensus is still calling for no rate hikes next year.
- Looking forward to 2023 (which is what most investors were concerned about going in), the majority of FOMC participants (11 of them) still see no rate hikes. While there are a few who think at least one rate hike will be needed prior to the end of 2023, the most likely scenario remains a rock-bottom federal funds rate until at least 2024.
The bottom line
The federal funds rate remains at a target range of 0% to 0.25%, the lowest it can be without going negative. However, the projections gave us some valuable insight into where monetary policy and the U.S. economy as a whole could be heading over the next few years.
Most importantly, it looks like the Fed expects inflation to remain in check for the foreseeable future, and for benchmark interest rates to remain at near-zero levels until at least 2024. This is what investors wanted to hear, and that's why we saw stocks (particularly the tech-heavy Nasdaq) jump after the announcement.
