DWS: FOMC meeting will bring no changes, but more optimism

January 22, 2021

This is a preview by Christian Scherrmann, U.S. Economist at DWS, on the January FOMC meeting.

We do not expect much of a change in the first FOMC meeting in 2021 in terms of forward guidance or outlook. The main development will most likely be the annual rotation of voting members within the FOMC. Here the remarks of the incoming voting member, Fed Atlanta President Raphael Bostic, kicked off quite a discussion as he said that he was  “…hopeful that in fairly short order we can start to recalibrate.” A few other FOMC members echoed this, though in a considerably milder tone. This emergence of tapering talk was, however, quickly put back into its box. Shortly thereafter, Fed Chair Powell stated that now was not the time to talk about an exit. As to when it would be time, Powell said “we will let the world know.”

For now, we expect the Fed to stick to the prevailing policy stance and not to initiate tapering discussions– even though there is some divergence among FOMC members on this issue. The recently passed round of fiscal support and the prospect of still larger stimulus may raise the Fed’s optimism on economic prospects. But the Fed will not share this optimism without warning that the path from now to a happy summer of vaccines, fiscal largesse, and better weather, reducing infections and boosting growth, could be rough. Recent weaker than expected economic data, such as jobless claims and retail sales in December, give grounds for caution. Some early mild indications of higher inflation from various surveys might be very much welcomed by the FOMC. They suggest an economy that might be eventually be able to reflate which fits well with the inflation tolerance the Fed has incorporated into its new framework. In the final analysis, however, it might be the extent of the recovery in the labor market that guides the Fed’s policy reaction – or an unwelcome overshooting of price rises, as Powell said.