“Dot Plot” Shows Wide Ranges, But No Expected Increase in Funds Rate for Years

As expected, the Federal Open Market Committee made no change to monetary policy at the conclusion of its meeting on June 10. The committee said that it will keep the federal funds rate in its current range of 0.00 to 0.25 percent “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” 

The FOMC also said that the central bank will continue to increase its balance sheet. “To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions.” This suggest purchases of $80 billion per month of long-term Treasurys and $40 billion per month of mortgage-backed securities. 

There was no discussion about other potential monetary policy tools, such as a negative fed funds rate; forward guidance, when the FOMC sets numerical targets for economic data (such as the unemployment rate) before it would raise the fed funds rate; or yield curve control, when the Fed would set a target for longer-term interest rates (such as the yield on a ten-year Treasury note). The FOMC has made it clear that it is extremely reluctant to push the funds rate negative, but some combination of forward guidance and yield curve control is likely later this year. 

In discussing current economic conditions, the statement noted the steep contraction in economic activity that has resulted from the coronavirus pandemic and the public health response. While it noted the recent improvement in financial conditions, it did not mention the much better-than-expected May jobs report, which showed a decline in the unemployment rate and the addition of 2.5 million net jobs over the month. 

The Summary of Economic Projections, or “dot plot,” which shows FOMC participants views on the outlook for the economy, indicates an extremely wide dispersion of views. All participants expect a steep contraction in the economy this year. But the range for the unemployment rate at the end of this year is from 7 percent to 14 percent, with a median of 9.4 percent. The range for GDP growth in 2021 is from -1 percent to 7 percent, with a median of 5.0 percent. The range for the unemployment rate at the end of 2021 is 4.5 percent to 12 percent, with a median of 6.5 percent, still well above the 3.5 percent rate that prevailed before the current crisis. 

Almost all participants expect the fed funds rate to stay in its near-zero range through at least 2022. The median level of the long-run funds rate was 2.5 percent, unchanged from the last SEP in December. (The FOMC did not release an SEP in March because of the highly uncertain environment at the time.) 

Core inflation is expected to remain below the FOMC’s 2 percent objective at least for the next few years, according to the dot plot. 

There was little surprising in today’s monetary policy statement. The FOMC is waiting to see how conditions evolve over the next few months. An economic recovery is likely taking hold now, and the FOMC later this year will want to ensure that the recovery remains in place and is a strong one. To that end, the committee is likely to implement strong forward guidance, calling for a near-zero funds rate until certain goals on the labor market and inflation are achieved, reassuring investors that rates will stay low for an extended period of time. This helps keep long-term rates low as well. Some sort of yield curve control is also likely later this year, with the FOMC setting an explicit target for one (or more) long-term interest rates. 

Stock prices initially jumped in the response to the statement, but have since given back those gains. Long-term yields have moved slightly lower.