Muted Market Reaction as Fed Vows to Maintain Bond-Buying Until ‘Substantial Progress’ in Recovery

Fed Tweaks Economic Outlook in Some Places

In addition to changing the language around the bond-buying program, Fed officials elevated their outlook on the economy since the last forecast in September.

The median expectation for gross domestic product in 2020 is now a decline of 2.4%, compared to the negative-3.7% in September. The outlook for 2021 is now at 4.2% compared to 4 previously and 3.2% in 2022 against 3%.

The outlook from there was reduced just slightly, to 2.4% from 2.5% in 2023 and 1.8% from 1.9% over the long run.

The committee also offered a considerably more optimistic outlook on unemployment. In 2020, the end-year rate is now projected to be its current 6.7%, from September’s projected 7.6%. In 2021, the median projection is for 5%, from 5.5%, while the two subsequent years are 4.2% (4.6% previously) and 3.7% (4%).

Officials still expect to be shy of the Fed’s 2% inflation objective until 2023, though 2020 and the next two years saw 0.1 percentage point increases to the outlook to 1.4%, 1.8% and 1.9% respectively.

Fed:  Economic Activity to Remain “Well Below” Pre-Pandemic Level

The Fed still sees economic activity recovering but “well below” the pre-pandemic levels. Overall, the committee expects the pandemic will “continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.”

Market Reaction

The March 10-Year Treasury Notes whipsawed after the Fed announcements, but interest rates ticked higher. Gold futures dipped. The U.S. Dollar hit a new intraday high and the benchmark S&P 500 Index edged lower from its intraday high.

Overall, the moves were muted and were not as volatile as predicted in pre-announcement analysis.

Fed Chair Jerome Powell will now discuss the policy decision in a news conference Wednesday afternoon.