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Fed adds a word of emphasis

December 17, 2020

graph that illustrates the unemployment rate at the outset of the first Federal Reserve Rate hike by expansion
Source: Bureau of Labor Statistics


The FOMC left monetary policy unchanged as expected yesterday. The post-meeting statement was mostly identical to that put out last month, but it did note for emphasis that the current pace of asset purchases would be maintained until “substantial” further progress is made on the employment and inflation goals. Jerome Powell’s press conference also leaned in the dovish direction, as the Fed chair reiterated that the path ahead is highly uncertain and that policymakers are committed to providing “powerful support” to the economy. Perhaps most importantly, the committee’s own projections still anticipate no rate hikes until at least 2024, a shot against creeping market expectations that a tightening cycle might begin within the next two years. There is still no sign here, then, that the Fed intends to deviate from the path that was laid out earlier this year and that in many ways represents a continuation of long-term re-orientation. Abetted by a structural decline in inflation, the FOMC has been increasingly willing to let the economy run in recent cycles before removing accommodation. In the last two expansions, for example, the Fed didn’t tighten until the jobless rate had fallen below 6.0 percent and now intends to hold steady in this cycle even as unemployment falls below 4.0 percent (note that, in addition to projecting an unchanged policy stance through 2023, the FOMC is also forecasting a 3.7 percent unemployment rate in two years). An ultra-dovish Fed is shaping up to be the defining characteristic of this cycle and it should mean another long expansion and further solid gains in risk assets.

Retail sales tumble

Retail sales were much weaker than expected in November, falling by 1.1 percent overall and 0.5 percent in the control group. Every major component outside of food, building materials, and non-store retailers showed a decline last month -echoing the outset of the pandemic in the early spring- and the biggest drops were unsurprisingly in the traditional holiday categories (department stores, clothing, electronics, etc.). And with the COVID infection rate continuing to climb in recent weeks and state and local governments increasingly reimposing business restrictions, it is a safe bet that sales will be soft again in December. This soft patch will give way to booming growth at some point in 2021, but it is for now still in its early stages and still deepening.


Daily Trivia

What firm’s ticker symbol, retired after a 2013 acquisition, referenced a man who passed away 26 years prior to the company’s founding in 1853?

Previous Question

What medieval ruler’s crown is depicted on the Czech Republic’s one koruna coin?


Wenceslas I


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