Watch: The Federal Reserve Performs A Rebalancing Act To Ease Conditions
Our assumption (from March) that the Federal Reserve will not raise policy rates until at least 2023 remains the same.
Absent a sustained rise in inflation above its target, the Fed will not tighten its policy rate until the labor market is largely healed (i.e., unemployment falls below 5%, which will occur in 2023 in our forecast). With the economy operating at well below potential and the boost in credit demand essentially defensive, inflation risks are likely overstated.
The Fed has committed to increasing purchases of government-backed bonds by at least their current pace, a clear indication that they're likely to do more than less in the future. We estimate the size of Fed's balance sheet is likely to reach 40% of GDP by year's end--a 21 percentage point climb over the year, reflecting about an additional 3 percentage point equivalent policy rate cut.
The environment remains extremely uncertain, which means we wouldn't be surprised if the Fed reaches further into its policy toolkit in the second half of this year and beyond. The Fed is warming up to the idea of instituting yield curve control, but not on setting negative rates.