Going into January's Federal Open Market Committee (FOMC) meeting, there was little expectation of a major shift in policy. Very early in the crisis, the Federal Reserve basically went all-in. In a sense, it was quite remarkable as the Fed quickly identified how bad the crisis would be and deployed all the tools it had developed during the 2008 financial crisis. The most impactful were zero percent rates and monthly asset purchases of Treasuries and mortgage-backed securities but more subtle were programs to provide liquidity for specific markets like corporate bonds and commercial paper to ensure that the economic weakness wouldn't spiral into a financial crisis which would compound economic damage.

Further in public statements, Fed officials have gone even further to affirm its dovish stance by increasing its threshold for raising rates. So in most FOMC meetings since the spring, the Fed has continued to monitor the economy and encouraged the federal government to deploy equivalent amounts of fiscal stimulus to support the economy. Relative to the previous crisis, there has been more fiscal stimulus and with Democrats taking control of the executive and legislative branch, expectations are that more is coming.

FOMC Statement

Given this backdrop, there's little action for the FOMC other than to revise their outlook. Since the crisis, the FOMC has slightly increased its forecast saying that the economy was more resilient than anticipated. However, the January meeting brought an acknowledgment that "growth had moderated" as the effects of the stimulus was wearing off.

The FOMC also reaffirmed its interest rate policy and the $120 billion per month of asset purchases. It also said that the economy's path will be more determined by the virus and pace of vaccinations rather than other factors. In his press conference, FOMC Chair Powell stressed the notion of tapering asset purchases given that the economy is well-off pre-coronavirus employment levels and far from its inflation target. Further, he dismissed concerns that the frothy action in specific stocks was a concern for the Fed.

Stock Market Outlook

Entering the FOMC meeting, the stock market had a nearly 25% gain since the beginning of November. The FOMC meeting was a non-event given that there was no real news from the Fed other than its slight downgrade of the economy. However, stocks did end the day lower although this was more attributed to the moves in highly-shorted stocks which was putting pressure on long-short funds to liquidate positions.

Going forward, the main focus will be on how much fiscal stimulus the Biden Administration can pass given its slim majority in the Senate. If fiscal stimulus falls short, then the Fed may be forced to get even more creative and aggressive. If fiscal stimulus is passed, then the Fed will likely continue its wait-and-see approach. Regardless, there's little reason to expect any change in Fed policy until the end of the year.