The Federal Reserve on Wednesday raised its forecast for 2021 gross domestic product by more than 50% from its December estimate while keeping interest rates stable.
GDP is now expected to grow 6.5% in 2021 before slowing in the following years, according to the Federal Open Market Committee, the central bank’s monetary policy-making group. This is significantly higher than the forecast of 4.2% made in December.
“After moderating the pace of the recovery, economic activity and employment indicators have recently recovered, although the sectors most affected by the pandemic remain weak,” the Fed said in a statement to the ‘outcome of its two-day meeting. “Inflation continues to drop below 2 percent.”
Political cartoons on the economy
The Fed cut interest rates to virtually zero a year ago, as the pandemic shut down much of the economy and bought $ 120 billion in bonds and other securities a month, maintaining credit easy and cheap which supported the economy and avoided further damage. His unprecedented actions, along with aid from Washington in the form of direct payments to working families, extended unemployment benefits, and support for businesses and governments, have been widely hailed as a success.
Markets rallied to the news, which was expected as the Dow Jones Industrial Average gained more than 150 points in initial trading after the statement.
The statement comes as numerous readings on the economy show progress within one year of the dramatic drop in GDP in the second quarter of 2020 as the nation has locked down to fight the coronavirus. With the end of the winter spike in coronavirus cases, the acceleration of vaccine rollouts, and additional stimulus from Congress, the economy has improved significantly since the start of the year.
The job market is improving, the manufacturing sector is strong and consumer spending, while taking a break in February amid a record cold spell, is expected to improve during the year. Many forecasters, in both the private and public sectors, have increased their GDP estimates for 2021 to 8%.
âWe have revised our full-year GDP growth forecast for 2021 upward to 6.4%,â Wells Fargo wrote in a note to clients last week. “This rate is not only higher than consensus expectations, but if achieved it would represent the fastest growth rate in the US economy since 1984.”
And if there are still 9 million unemployed, it is well below the 22 million who lost their jobs in March and April of last year – a drop on a scale never seen before. But, the economy has also never “achieved the feat of creating more than 11 million jobs in five months, as it did between May and September,” noted Goldman Sachs last month.
The Fed has always said that until labor market conditions improve, it will allow inflation to exceed its 2% target. While some economists and politicians have raised the specter of inflation – particularly with an additional $ 1.9 trillion stimulus set to inject into the economy with the passage of President Joe’s US bailout Biden, others noted that there was still a significant slowdown in the global economy.
Bernard Baumohl, chief global economist at The Economic Outlook Group, acknowledges growing concern about an upward spiral in inflation this year as annual GDP hits a possible range of 6%.
âThe concern has been that this would push 10-year Treasury yields to 2% or even exceed it this year,â Baumohl said. “But what is often missing in the equation is the desire of foreign investors (both private bankers and central bankers) to buy US debt since their real returns now look much more attractive compared to the sovereign debt of all other industrial countries. “
Indeed, during the last 10-year Treasury debt offer, demand was solid.
“Total foreign ownership of US Treasuries in January rose to $ 7.12 trillion, a 12-month high,” Baumhol notes. At speed, foreign demand for Treasuries will continue to rise, which should keep yields from climbing to a point where they can stifle US growth. “
And, he stresses, “No one should be more quietly grateful for this foreign appetite than Jerome Powell” because it takes the pressure off the Fed to raise interest rates any time soon.
While much of the current optimism for 2021 reflects the performance of giant global companies that have adapted their business models during the pandemic, even small businesses are seeing promising developments.
cabbage, an American Express company, recently surveyed 550 companies with workforce sizes of less than 20 to 500 employees. He found that 57% of them are fully open as states and localities relax restrictions and vaccinations become more available. And the survey found that many had increased their online sales, as did big companies like Walmart and Lowe’s.
âThe switch to the Internet has reset income expectations in small businesses,â the Kabbage Small Business Recovery Report revealed. âBefore the pandemic, respondents said their average monthly online sales represented 37% of total revenue. In February 2021, those numbers had risen to 57%, an increase of 54% in less than a year . “