ACPI Product Team Special Commentary Q2
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June FOMC Meeting Recap: No Imminent Tapering, Hawkish Dot Plot Projections, & Still Transitory Inflation

The FOMC keeps its dovish stance intact but new dot plot projections show earlier rate liftoff in 2023 than previous projections at March meeting


The Federal Open Market Committee (FOMC) keeps rates on-hold and its asset purchase program unchanged, and reiterates “substantial further progress” will be needed before tapering asset purchases. However, the new dot plot projections show rate liftoff could start as early as 2023, one year earlier than previous forecast, suggesting committee members have brought forward their expectations of eventual tightening.

Main Points

  • The FOMC admitted that the committee discussed tapering at this meeting but signaled no imminent tapering while acknowledging progress on the vaccine front. The target range of the funds rate is maintained at the effective lower bound of 0 to 0.25 percent, and the key parameters (pace and composition) of asset purchases are unchanged (at least $80bn of Treasuries and at least $40bn of agency MBS per month).
  • The FOMC considerably raised the median projection for PCE inflation by 1% for 2021, but by only 0.1% for both 2022 and 2023, suggesting the Fed indeed believes this year’s inflation surge is transitory. Unemployment and GDP forecasts were largely unchanged.
  • 7 of the 18 FOMC committee members now expect at least 1 rate hike in 2022 vs. 4 members at March meeting, but the median rate projection for 2022 remains unchanged, implying no rate hike in 2022. Despite little change in 2023 core inflation projections, 13 of the 18 members now expect at least 1 rate hike by end of 2023 vs. 7 members at March meeting, and the median rate projection shows 2 rate hikes by end of 2023 (vs. no rate hike at March meeting), which is the most hawkish part of today’s FOMC messaging.
  • However during the presser, Powell intentionally downplayed the significance of the dot plot projections by stating that projections should be taken with a grain of salt and the committee did not talk about in which year they intend to lift rates during the two-day meeting.
  • The FOMC also made some technical adjustments. It raised the interest rate (IOER) that the Fed pays to commercial banks on reserves that they hold at the central bank as well as the rate (RRP) on the Fed’s reverse repurchase agreement facility.

Implications: Still A Few Months Away From Tapering

Today’s FOMC is closely watched as inflation is running high recently and markets are thus eager to know the Fed’s timeline for tapering. Markets’ initial reaction was hawkish as yields shot up considerably along with the US dollar. Equity markets dipped initially on hawkish projections but then rallied on Powell’s dovish comments before closing lower alongside gold. Banks were up helped by higher yields.

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