The Federal Reserve had its second Federal Open Market Committee (FOMC) meeting of the year on March 16 and 17. The Committee decided to keep the Fed Funds rate at zero and maintained its current pace and mix of asset purchases. In light of recent improvements, FOMC members did upgrade their forecasts for growth, employment, and inflation. However, the consensus remains that there will be no rate hikes until 2023.

Following the meeting, stocks and commodities were sharply higher, while bonds tumbled.

FOMC Meeting

In a unanimous decision, the FOMC maintained rates at zero and $120 billion in bond purchases per month. The major change was in the FOMC statement: "Following a moderation in the pace of the recovery, indicators of economic activity and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak. Inflation continues to run below 2 percent."

Forecasts for 2021 GDP were increased to 6.5% from 4.2% due to the stimulus passing and recent, positive economic data along with improvements in coronavirus case counts. The unemployment forecast was decreased to 4.5% from 6.2%. Core inflation expectations increased to 2.2% from 2% earlier.

However, the market had a positive reaction to the meeting as it indicated no change in its interest rate hike timetable. Futures markets had started to price in hikes in 2022 and 2023 but the FOMC statement and Federal Reserve Chairman Jerome Powell's press conference pushed back against the notion.

Powell said that inflation may be temporarily elevated in 2021 due to year over year comparisons but it wouldn't be enough to force the Fed to hike rates: "I would note that a transitory rise in inflation above 2% as seems likely to occur this year would not meet this standard."

Stock Market Outlook

It's an interesting development that the Fed has been quite adamant about its new framework for raising rates. It even devoted its last Jackson Hole meeting to outlining that concept. However, the market still hasn't taken it credibly, this is evident with futures markets which are showing rate hikes in 2022 and 2023.

The latest FOMC meeting did push back against that forcefully. It's certainly a positive for the economy and asset markets as it means that the economy will be allowed to run hot for an extended period of time.