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Question #6 for 2021: Will the Fed raise rates in 2020? What about the asset purchase program?

Earlier I posted some questions for next year: Ten Economic Questions for 2021. I’m adding some thoughts, and maybe some predictions for each question.

6) Monetary Policy:  The Fed cut rates to zero in 2020 in response to the pandemic, and has signaled they will be on hold for some time.  Will the Fed raise rates in 2021?  Will the Fed end – or taper – the asset purchase program?

In March, in response to the pandemic, the Fed cut rates to essentially zero:

“Effective March 23, 2020, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 0 to 1/4 percent.”

In addition, the Fed has been buying assets, from the December statement:

“the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”
emphasis added

An important point: The Fed will look through any blip in inflation in 2021 (there will be some weird distortions in the numbers). 

As of December, looking at the “dot plot”, the FOMC participants see the following number of rate hikes in 2021 and 2022:

  FOMC
Members
2021		 FOMC
Members
2022
No Change 17 16
One Rate Hike 0 1


Clearly the main view of the FOMC is no change in policy in 2021.

As far as asset purchases, from Professor Tim Duy: Four Points to Know About the FOMC Meeting

the Fed explicitly intends to hold the size of purchase at or above the current pace until the Fed achieves clear further progress toward its economic objective. Note though that “further progress” is not complete progress. The Fed will pull back on the asset purchase program before raising interest rates. When and under what conditions? Powell declined to answer that question but did promise there would be advance notice. Look for that notice to begin next year if the economy looks to rebound strongly as expected by mid-2021.

There will be no rate hike in 2021, and since I’m assuming the pandemic will subside by mid-year 2021, it seems likely the Fed will taper asset purchases sometime in the second half of 2021.