Avoiding Turbulence: Fed Policy and Communication in 2021

The January FOMC (Federal Open Market Committee) meeting was uneventful. As expected, the Fed left policy unchanged, and only made small changes to the FOMC statement to reflect the recent economic weakness related to the resurgence in COVID-19 cases. In his press conference, Fed Chair Jerome Powell struck a balance between emphasizing the current economic weakness and an improved economic outlook, while reiterating that the current highly accommodative stance of monetary policy is appropriate to maintain the economic recovery. Underscoring this point, Powell said, “We’re going to remain accommodative until we see improvement in the economy and not just in the outlook.” And in terms of how this cautious approach relates to asset purchases, Powell suggested it would be “quite some time” before substantial further progress is met – the trigger for the Fed to start to reduce the monthly pace of purchases.

Because of the outlook for highly expansive U.S. fiscal policy, many market participants have shifted focus to the Fed’s exit strategy. According to Powell, however, it is premature for the Fed to start publicly discussing any shift toward less accommodation. Nonetheless, we think the Fed is planning for a range of scenarios, including one in which

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