The FOMC meets on Wednesday and Thursday of this week and will issue its post-meeting statement at 2:00 PM ET on Wednesday. Further monetary accommodation is unlikely given the most recent round of fiscal stimulus beyond the winter package, though there may be talk of yield curve control in the face of rising bond yields. Average inflation targeting, which implies zero-rates beyond the return of inflation to 2%, supports a ZIRP position for the foreseeable future, though the markets are braced for the median Fed funds rate projections in the March SEP to show a 2023 rate hike.
The updated SEP at the March meeting will need to incorporate the introduction of vaccines and two rounds of fiscal stimulus since the December 15-16 FOMC meeting, as well as an array of upside surprises since December for most U.S. economic and inflation reports. Boosts in growth prospects at the March meeting will extend the hikes evident in both the December and September SEP reports from the bleak official forecasts in July.
We expect a boost for the median 2021 GDP estimate to the 4.8% area from 4.2% in December, 4.0% in September, and a higher 5.0% in June when they assumed a much bigger 2020 drop with an ensuing bigger 2021 bounce. The median jobless rate estimate for 2021 will be lowered to the 4.6% area from 5.0% in December, 5.5% in September, and 6.5% in June.
The PCE chain price medians for 2021 should cautiously sit at around 2.2% for the headline and 2.0% for the core, after 1.8% December medians for both, September medians of 1.7%, and respective June medians of 1.6% and 1.5%. The Fed will likely low-ball the inflation estimates relative to the hefty price gains evident thus far in 2021. See our policy outlook page for a table of assumptions for the Fed’s revised forecasts.
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In the following, we summarize economic developments that have occurred since the last FOMC meeting in January regarding the labor market, inflation and consumption.
The Labor Market
Payroll gains started 2021 on a stronger footing after the -306k December drop that reflected the resurgence and subsequent lockdowns, and seasonal factors that expected a normal holiday period. We saw an average payroll gain of 273k in the first two months of 2021, after a 2020 average payroll drop of -786k. The unemployment rate sat at a 3.5% cycle-low in February of 2020, before surging to 4.4% last March and peaking at 14.7% last April. The rate has since eased to 6.2% in February, down a tick from 6.3% in January, and 6.7% in both November and December. The participation rate tumbled from a 5-year high of 63.3% in January and February of 2020 to 62.7 last March and a 48-year low of 60.2% last April, before climbing to 61.4% through February of this year.
The y/y average hourly earnings gauge was lifted sharply in April of 2020 by the shift in the compositional mix of jobs with the shutdowns, as layoffs were heavily concentrated among low-wage employees. This measure rose from what was a cycle-high of 3.4% in March of 2020 to 8.0% last April, before falling back to 4.4% by November. The y/y gauge bounced again to 5.5% in December with further layoffs and held at 5.3% in both January and February.
Employment in the goods sector has shed jobs in both January and February of this year, after improving steadily in the second half of 2020. Monthly goods-based employment changes are averaging -61k in 2021, from -69k in 2020, versus averages of 8k in 2019 and 52k in 2018.
Continue reading the complete FOMC Meeting Report.