Fed to maintain ultra-loose policy stance throughout this year – Capital Economics

Capital Economics analysts note that the US economic outlook continues to brighten with the rapidly accelerating vaccine rollout but don’t see the Fed abandoning its “current ultra-loose policy stance throughout this year.”

Key quotes

“Admittedly, we learned this week that GDP growth slowed to 4.0% annualised in the fourth quarter, as pandemic-related restrictions on activity and the fading of earlier fiscal support drove a sharp slowdown in consumption growth. Despite acknowledging that near-term virus-induced weakness, however, the Fed’s policy statement on Wednesday signalled greater confidence in the outlook further ahead.”

“At the same time, although disposable incomes fell by 9.5% annualised in the fourth quarter, December’s $900bn fiscal package will result in a renewed surge in the first quarter, which will be even stronger if Congress passes yet more stimulus over the coming weeks. Together, we expect the boost from vaccines and fiscal policy to help drive a marked acceleration in GDP growth to an above-consensus 6.5% this year.”

“But even that may not be enough for the Fed to start bringing forward its plans to tighten monetary policy. Powell’s emphasis on the continued shortfall in employment, and his argument that any significant rebound in inflation this year was most likely to be transitory, suggests the Fed is still firmly focused on providing maximum support to the economy.”