The Fed's improved economic projections see US GDP fully rebounding by year-end 2021

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The Fed's improved economic projections see US GDP fully rebounding by year-end 2021
Caroline Brehman/CQ-Roll Call/Getty Images
  • Federal Reserve policymakers expect the US to stage a full recovery in 2021, according to projections published Wednesday.
  • The Federal Open Market Committee's median estimate for 2020 growth landed at -2.4%. The median expectation for 4.2% growth in 2021 fully offsets the pandemic-induced slump.
  • Committee members expect the unemployment rate to fall to 5% next year from 6.7%. The rate isn't projected to reach pre-pandemic lows until 2023, according to the forecasts.
  • The projections come alongside the Fed's latest policy meeting. Central bank officials elected to hold interest rates near zero and maintain the current pace and composition of its asset purchases.

The Federal Reserve revealed new economic estimates on Wednesday that see the US economy staging a healthy recovery through 2021.

Federal Open Market Committee members expect US gross domestic product to contract 2.4% in 2020 before climbing 4.2% in 2021, according to projections published Wednesday. The forecast signals the country will fully recover to pre-pandemic levels by the end of next year. Growth is seen reaching 3.2% in 2022 and slowing further to 2.4% in 2023.

The committee's median estimate for 2020 unemployment reached 6.7%, implying December's nonfarm payrolls report won't bring an improvement to the rate. The Fed then expects unemployment to drop to 5% in 2021. The rate won't return to pre-pandemic lows until 2023, when the central bank expects it to reach 3.7%.

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The estimates come alongside a relatively uneventful decision from the committee. Members decided to hold interest rates near zero and maintain their current pace and composition of asset purchases.

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"The Fed has made it clear that downside risks to the economy still persist in the coming months despite what financial markets may be signaling with risk assets performing well and stocks near record highs," Charlie Ripley, senior investment strategist for Allianz Investment Management, said.

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Some economists expected the central bank to either adjust its asset purchases or offer new guidance for the purchase program. Such updates are at least pushed back to the FOMC's January 26 to January 27 meeting.

The central bank currently buys $80 billion of Treasurys and $40 billion of mortgage-backed securities a month.

The Fed's Wednesday statement clarified that its asset purchases will continue at their current pace until "substantial further progress" is made toward reaching its inflation and employment goals. The central bank updated the targets in August, signaling it won't lift interest rates until the US achieves maximum employment and inflation trends above 2% for a period of time.

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Federal Reserve Chairman Jerome Powell didn't specify which inflation or employment levels would trigger a change to its purchases. He noted in a press conference that the progress needed for an adjustment is still "some ways off."

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Powell also supported Congress's moves toward passing a new stimulus bill. Lawmakers have until the end of the week to reach a compromise before the federal government shuts down. Various news outlets reported earlier Wednesday that Congressional leaders are close to approving a nearly $900 billion package that includes direct payments and aid for small businesses.

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The Fed chair endorsed such action, straying from his typical reluctance to comment on fiscal stimulus.

"With the expiration of some of the unemployment benefits, the expiration of eviction moratoriums, with the virus spreading the way it is, there's a need for households and businesses to have fiscal support," Powell said. "I certainly would welcome the work that Congress is doing right now."

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