It is unusual for there to be dissent inside the Federal Reserve Open Market Committee this soon after the start of the worst recession in the modern era. While Jerome Powell and the FOMC members did not make any change to the current interest rates, two dissenting votes our of ten signals that perhaps the Federal Reserve needs better unification on its view toward monetary policy.
It was just last month that Fed Chairman Jerome Powell signaled that interest rates would remain lower for an extended period, but Powell also made some changes to have the Fed ignore and actually target some higher inflation.
Wednesday’s FOMC statement noted that the COVID-19 pandemic is still causing tremendous human and economic hardship, but the Fed’s view is that economic activity and employment have recovered in recent months even if they remain handily under their pre-recession levels. The Fed also believes that its easing and financial support have helped overall financial conditions to improve.
As for an outlook, Powell and his team of Fed presidents see the ongoing public health concerns weighing on economic activity, employment, and inflation in the near term. This also brings considerable risks to the Fed’s economic outlook over the medium term.
While a 2% inflation target has persisted for years, and with real inflation running persistently below that target, the FOMC statement did target higher inflation. It said:
The Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent.
To get to that target on inflation, the FOMC has committed to maintaining an accommodative stance of monetary policy until these outcomes are achieved.
Powell is also committed to growing the Fed’s balance sheet even further. The Fed will increase its holdings of Treasury securities and agency mortgage-backed securities over coming months at least at the current pace. Its aim is to maintain smooth market functioning and to maintain accommodative financial conditions.
The first of the two dissenting votes came from Robert Kaplan of the Dallas Fed. Kaplan expects that it will be appropriate to maintain the current target range until the FOMC has confidence that the economy has weathered recent events and is back on track to achieve its maximum employment and price stability goals. he would still prefer for the FOMC to retain greater policy rate flexibility beyond that point.
Neel Kashkari of the Minneapolis Fed prefers for the FOMC to indicate that it expects to maintain the current target range until core inflation has reached the prior 2 percent goal on a sustained basis.
The two-day FOMC meeting was also followed with updated average assumptions from the Federal Reserve presidents about the economy in 2020 and forecasts out to 2023.
The average forecast for GDP is now -3.7% in 2020, followed by growth of 4.0% in 2021, followed again by 3.0% growth in 2022 and 2.5% GDP growth in 2023.
Its average unemployment expectations now see unemployment getting back down to 7.6% by the end of 2020. The averages also came to 5.5% unemployment in 2021, followed by a drop to 4.6% in 2022 and a further drop to 4.0% by 2023.
Despite calls for higher inflation, the PCE inflation average projections are still under that 2.0% target. The Fed’s average PCE inflation target is just 1.2% for 2020, followed by 1.7% inflation in 2021, 1.8% inflation in 2022 and ultimately 2.0% in 2023. The core” PCE inflation targets are identical in the outer years, but the core PCE inflation target for 2020 was 1.5%.