December 2020 US Federal Reserve meeting

The results of the last US Federal Reserve meeting this year were published yesterday evening.

The regulator, as expected, kept the key rate (fed funds rate) unchanged in the range of 0-0.25% per annum. All 10 members of the Open Market Committee (FOMC) voted in favor of this decision.

Monetary policy parameters

The regulator noted that the rate will remain within this target range until the labor market reaches its maximum employment and inflation approaches the level of 2% or higher. The Fed also stressed that monetary policy will remain stimulating and will depend on the current situation in the US economy.

The QE program (buyout of government and mortgage bonds) will continue, at least in the current volumes – $120 billion per month. In addition, REPO transactions will be carried out.

FOMC Forecast

The average forecast of FOMC participants assumes that the key rate will remain at the level of 0.1% until the end of 2023, with a subsequent increase in the rate to 2.5% in the long term.

The forecast for the US GDP for 2021 has been revised upward, implying an economic growth of 4.2%. At the previous meeting in September, the regulator expected a 4% growth. The forecast for unemployment was also improved (from 5.5% to 5%) and for inflation (from 1.7% to 1.8%).

At the same time, the Fed's target for inflation is 2% per annum, and for the unemployment rate – about 4-5%. Consumer inflation (CPI) in November remained at 1.2% per annum, unemployment fell from 6.9% to 6.7%.

Fed Chairman Jerome Powell's Speech

During his speech, the head of the regulator stressed that the Covid-19 pandemic caused huge damage to the US economy, which still remains below the level observed before the crisis. At the same time, Powell assumes that the US economy will start to grow strongly in 5-6 months. However, until that time, the risks are very high and the need for more active fiscal stimulus is more urgent than ever. 

Recall that at the moment, the Congress is agreeing on a cut-down «republican» version of the new aid package of about $900 billion.

Implications for markets

The reaction of the American stock market to the results of the meeting was moderate, as the regulator did not present any surprises. However, the US dollar reacted with further decline, continuing to weaken across the entire spectrum of the market.

In general, the Fed's statements reflected the regulator's readiness to actively financially stimulate the economy in the fight against the consequences of the pandemic, as well as to adjust monetary policy if necessary.