December 31, 2020




    The COVID-19 pandemic blew a hole in the longest U.S. economic expansion since the end of the Second World War.  At year-end, the pandemic continued to reverberate throughout the economy, causing states and municipalities to re-impose or tighten restrictions in an effort to slow the spread of the virus.  Uncertainties surrounding the worsening health situation and the deployment of vaccines have kept businesses, large and small, uneasy.  The labor market has weakened and consumers have started to rein in their spending.  A pick-up in growth may have to wait on the widespread availability of vaccines and further proof of their effectiveness.  In sum, the economy faces many challenges over the next few months.

Comsumer Sentiment Spending



The economy is starting the New Year on tenuous footing and the Federal Reserve is clearly worried about its downside risk.  The Federal Open Market Committee (FOMC) at its December 16th meeting voted unanimously to maintain the current policy stance, keeping the fed funds rate near zero.  The Committee also elected to continue to increase its asset holding at the current pace ($80 billion U.S. Treasuries and $40 billion Agency mortgage bonds) “until substantial further progress has been made toward the committee’s maximum employment and price stability goals.”

Weekly Initial Jobless Claims


    In their updated Summary of Economic Projections (SEP) the majority of committee members indicated that they believe the target range of fed funds will need to remain near zero through 2023.  On the other hand, the committee revised its forecasts for real GDP growth slightly higher in 2020 and 2021, while moving the median projected unemployment rate lower through 2022, compared to projections in the September SEP. The outlook of the committee members is always subject to change, and the rollout of the COVID vaccines may have caused committee members to revise their forecasts. Further modifications remain likely as the path of the coronavirus and the ability of the vaccines to control it becomes clearer.

FOMC Year End Projections




Potentially cushioning near-term economic weakness is another round of fiscal support passed by Congress and eventually approved by the President.  Along with a quicker-than-expected start to vaccine rollout, the relief package will help smooth over what is expected to be a weak period for economic growth over the next few months.  The legislation includes a $600 direct payment to most Americans, an additional $300 per week in unemployment benefits through mid-March, small business aid as well as money for schools, airlines and for distribution of vaccines.

Bloomberg Financial Conditions

     The extraordinary monetary and fiscal support measures from the Fed, Congress and the Administration will hopefully build a bridge over the hole in the economy and allow households and businesses to make it across.  The path of the economy remains dependent on the path of the virus, but pandemic-related risks may be more balanced than previously thought given the positive developments in the vaccines.  The loss of momentum in the economic recovery suggests activity will likely remain sluggish in the early part of 2021, perhaps even dipping back down into recession territory in the first quarter. Still, the economic rebound should reemerge in the spring and summer provided better weather and wider availability of vaccines allow for some resumption of normalcy.  The healing in the economy should also strengthen the inflation outlook, especially with exploding money supply and a rapidly expanding Federal deficit.  Our base case remains that building inflationary pressures will likely force the Fed to pull forward forecasted monetary policy adjustments and that we could see the fed funds rate start moving higher sometime in 2022.