Daily Management Review

US Fed updates inflation target, improves macro outlook


The US Federal Reserve System (Fed), following the September meeting, left its key rate at 0–0.25% per annum. Judging by the dotted graph, the open market committee members are not expecting a rate hike until 2023. The authority has updated the wording on inflation target - now the Fed will strive for the level "slightly above 2%" and for maximum employment, until which rates will not rise. At the same time, the forecast for the American economy has been significantly improved: the decline this year will amount to 3.7% instead of the previously expected 6.5%. Unemployment rates will be lower and inflation rates - higher than the previous forecast.

Following the meeting on September 15-16, the US Federal Reserve Open Market Committee expectedly refrained from changing the rate - after in March it urgently lowered it to the level of 0-0.25%. The updated dot chart with forecasts for the rate does not imply an increase by the end of 2023.

In the statement made, the regulator adjusted the wording in accordance with the adopted change in its long-term goals: the Fed will strive for the inflation rate "slightly above 2%", so that on average it is equal to 2% and long-term expectations correspond to it (since 2010 there were only 13 months, when the indicator was above this level, the average inflation in the United States for this period was 1.6%). As a reminder, at the end of August the committee decided that a slight deviation from the target would be possible for "some time", since before that the indicator was below the target. This means moving towards targeting based on an average metric. Regarding employment, the regulator will not assess “deviations” from the maximum level, but “shortage”.

The Fed also updated its macro forecast on Wednesday - according to it, the US economy will decline 3.7% this year, not 6.5%, as expected back in June (an increase of 4% instead of 5% in 2021 and 3% instead of 3.5% - in 2022). Recall that the decline in US GDP in the second quarter of 2020 amounted to 9.1% against the first estimate of 9.5% (in the first quarter there was an increase of 0.3%). Inflation rates (excluding energy and food) should rise by 1.2% this year, not by 0.8% (1.7% and 1.8% in the next two years). The unemployment forecast for this year has been lowered from 9.3% to 7.6% (down to 4% by 2023). Meanwhile, the latest data from the US Department of Labor showed that the unemployment rate in August fell to 8.4%, while in April it was a record 14.7% (record low of just 3.5% in February). Inflation accelerated slightly in August - from 0.9% to 1% (from 1.1% to 1.3% after deducting energy and food).

On Wednesday, an updated forecast from the OECD was also presented - they expect the world economy to sag by 4.5% this year (this estimate was immediately improved by 1.5 percentage points), before growing by 5% in 2021 (estimate decreased by 0.2 points). In the United States, the size of the economy will shrink by 3.8%, but in 2021 it will grow by 4%, in the euro area - it will fall by 7.9% and grow later by 5.1%. China will see growth both this - by 1.8% and next year - plus 8%.

source: bloomberg.com