Muted Market Reaction as Fed Vows to Maintain Bond-Buying Until ‘Substantial Progress’ in Recovery

In its final meeting of the year, the U.S. Federal Reserve made a key adjustment to its efforts to support the economy, while upgrading its look for growth ahead. In a widely expected move, central bank policymakers held their benchmark interest rates near zero following the conclusion of its two-day meeting Wednesday.

Fed Commits to Keep Buying Bonds

The Fed said it would continue to buy at least $120 billion of bonds each month “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals,” the post-meeting statement said.

“These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses,” the Federal Open Market Committee added in a statement that gained unanimous approval.

The FOMC did not, however, say it would extend the duration of those purchases.

Fed Tweaks Economic Outlook in Some Places

In addition to changing the language around the bond-buying program, Fed officials elevated their outlook on the economy since the last forecast in September.

The median expectation for gross domestic product in 2020 is now a decline of 2.4%, compared to the negative-3.7% in September. The outlook for 2021 is now at 4.2% compared to 4 previously and 3.2% in 2022 against 3%.

The outlook from there was reduced just slightly, to 2.4% from 2.5% in 2023 and 1.8% from 1.9% over the long run.

The committee also offered a considerably more optimistic outlook on unemployment. In 2020, the end-year rate is now projected to be its current 6.7%, from September’s projected 7.6%. In 2021, the median projection is for 5%, from 5.5%, while the two subsequent years are 4.2% (4.6% previously) and 3.7% (4%).

Officials still expect to be shy of the Fed’s 2% inflation objective until 2023, though 2020 and the next two years saw 0.1 percentage point increases to the outlook to 1.4%, 1.8% and 1.9% respectively.

Fed:  Economic Activity to Remain “Well Below” Pre-Pandemic Level

The Fed still sees economic activity recovering but “well below” the pre-pandemic levels. Overall, the committee expects the pandemic will “continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.”

Market Reaction

The March 10-Year Treasury Notes whipsawed after the Fed announcements, but interest rates ticked higher. Gold futures dipped. The U.S. Dollar hit a new intraday high and the benchmark S&P 500 Index edged lower from its intraday high.

Overall, the moves were muted and were not as volatile as predicted in pre-announcement analysis.

Fed Chair Jerome Powell will now discuss the policy decision in a news conference Wednesday afternoon.