Faster Recovery?

Federal Reserve officials now expect a faster economic recovery than previously predicted with revised estimates of 54% more GDP growth in 2021.

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Key Points

  • As expected, the Federal Open Market Committee (FOMC) held the federal funds target rate range at 0.00-0.25%.
  • Federal Reserve (Fed) projections for 2021 show a sharp jump in GDP growth from December’s estimate of 4.2% to 6.5% and in the unemployment rate (down from 5% to 4.5%). Inflation is now projected to hit 2% in 2021, ahead of the Fed’s previous projection that inflation would rise 2% mark in 2023.
  • FOMC’s language changes were minimal as the vaccination rollout and drop in new COVID cases continue, two key factors that have generated continued optimism for the economy.

At their March meeting, optimistic Fed officials revised their projections for GDP growth in 2021 sharply upward from 4.2% to 6.5%, while adjusting employment numbers downward from 5% to 4.5%.  “The recovery has progressed more quickly than generally expected,” Fed Chairman Jerome Powell said at a post-meeting press conference. “While we welcome these positive developments, no one should be complacent.”

As expected, the Fed also kept interest rates near zero and said they still expect rates to remain at current levels through 2023. They also reaffirmed support for the economy and financial markets until inflation rises above 2% “for some time.” Fed officials said they now expect inflation to reach 2% in 2021 instead of the previous projection of 2023. The Fed’s expectation is that the rise in inflation will be transitory and wouldn’t cause the Fed to take action. “We’re committed to our framework,” Fed chief Jerome Powell said.

Below are the language changes made in the Fed’s statement from January:

JAN. 27 STATEMENT

The pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic. Weaker demand and earlier declines in oil prices have been holding down consumer price inflation.

MAR. 17 STATEMENT

Following a moderation in the pace of the recovery, indicators of  economic activity and employment have turned up recently, although the  sectors most adversely affected by the pandemic remain weak. Inflation continues to run below 2 percent.

This was a first look at Fed projections for 2021 and provided the market with a glimpse at how the vaccine distribution and decrease in the number of new U.S. COVID cases have changed the committee’s economic outlook from three months ago.

Here are the committee’s March projections for GDP, unemployment, inflation, and the federal funds rate for 2021:

The Fed’s “Dot Plot” showed rates were expected to remain at current levels for the coming years. While all policymakers expect the fed funds rate to remain near zero through the end of 2021, four officials saw rates increasing in 2022, while seven saw a higher fed funds rate in 2023:

After the FOMC comments, the 10-year Treasury rose by 1 basis point to 1.63%; short and long rates ended mixed on the day:

In Conclusion

The biggest takeaway was the Fed’s revised projections that would put the U.S. economy on a much faster recovery track. Markets gained traction during the Fed’s press conference as investors got their first glimpse at Fed projections for 2021. The dollar fell from the day’s highs, while U.S. stocks moved higher as Chairman Powell spoke. The Dow Jones Industrial Average and S&P 500 finished the day up at 0.58% and 0.29%, respectively. Fed officials reaffirmed their stance that policy will remain highly accommodative until they are confident the economy is far enough along the road to recovery. While the committee indicated it is confident and determined to achieve the 2% average inflation goal, it appears that the U.S. economy is on the path to achieve this, as the committee’s projections show quite a bit more optimism than markets have seen for a while. With the next meeting scheduled for April 27-28, we will have to wait and see how continued vaccine distribution and state reopenings propel the economy in the interim.

Definitions

One basis point is equal to 0.01%.

The Dow Jones Industrial Average index (DJIA) tracks the share price of the top 30 large, publicly-owned U.S. companies which is often used as an indicator of the overall condition of the U.S. stock market.

The S&P 500 index is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the U.S. stock market.

Disclosures

This publication is provided by Pacific Funds℠. Pacific Funds refers to Pacific Funds Series Trust. The views in this commentary are as of March 17, 2021, are based on current market conditions, and are subject to change without notice. These views are presented for informational purposes only, should not be construed as investment advice, an endorsement of any security, mutual fund, sector, or index, the offer or sale of any investment, or to predict performance of any investment. Any forward-looking statements are not guaranteed. All materials are compiled from sources believed to be reliable, but accuracy cannot be guaranteed.

All investing involves risk, including the possible loss of the principal amount invested.

Pacific Life Insurance Company is the administrator for Pacific Funds. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products.

Investors should consider a fund’s investment goal, risks, charges, and expenses carefully before investing. The prospectus and/or the applicable summary prospectus contain this and other information about the Fund and are available from PacificFunds.com. The prospectus and/or summary prospectus should be read carefully before investing.

Pacific Funds is a registered service mark of Pacific Life Insurance Company ("Pacific Life"). S&P is a registered trademark of Standard & Poor’s Financial Services LLC. All third-party trademarks referenced by Pacific Life, such as S&P, belong to their respective owners. References of third-party trademarks do not indicate or signify any relationship, sponsorship or endorsement between Pacific Life and the owners of referenced trademarks.

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