The Fed Holds Policy Steady at June 2021 Meeting

Federal Open Market Committee Apparently Unfazed by May CPI-U Surge

FOMC June 2021 Highlights

  • The Federal Open Market Committee (FOMC) ended its June 15-16, 2021 meeting by announcing no change in policy.
  • While recognizing that inflation has risen, they attribute this mainly to "transitory factors" that will abate.
  • However, the consensus of members is that the federal funds rate will be increased in 2023.

The Federal Open Market Committee (FOMC), the chief policy-setting body within the U.S. Federal Reserve System, held its latest meeting on June 15-16, 2021. Despite a surge of inflation in May, the FOMC issued a statement that was largely identical to that released after its previous meeting, held on April 27-28, 2021.

One noteworthy change is that FOMC members project that the federal funds rate will be raised to an average of 0.6% in 2023, up from an average of about 0.1% currently. The last time that members projected the future course of the federal funds rate, in March 2021, they foresaw no change through 2023.

The FOMC statement was released at 2:00 p.m. EST on June 16, 2021, and the response of the markets in the immediate aftermath has been muted. As of 3:05 p.m., the S&P 500 Index was down by 0.64% from its open.

June 2021 FOMC Statement Highlights

The FOMC remains committed to promoting “maximum employment and price stability.” While noting that inflation has risen, the FOMC still attributes this largely to “transitory factors,” and states again that it will “maintain an accommodative stance of monetary policy” as long as “inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent.” Also as in April, the FOMC statement acknowledges that inflation is “on track to moderately exceed 2 percent for some time.”

The FOMC will keep the federal funds rate unchanged at a target range between 0% and 0.25%. The Fed also will continue to increase its holdings of Treasury securities and agency mortgage-backed securities by at least $80 billion and $40 billion per month, respectively.

Effective June 17, 2021, the interest rate paid on required and excess reserve balances will increase from 0.10% to 0.15%, while overnight reverse repurchase agreement operations will take place at an offering rate of 0.05 percent, up from 0.00%.

Inflation Surges In May 2021

The FOMC's decision not to signal concerns about rising inflation comes a week after the U.S. Bureau of Labor Statistics (BLS) reported that the Consumer Price Index For All Urban Consumers (CPI-U) was up by 5.0%, year-over-year (YOY) through May 2021, the index's biggest 12-month surge since the 5.4% increase during the period ending August 2008. During the month of May 2021 alone, the index rose by 0.6% on a seasonally-adjusted basis. Compounded over the course of 12 months, this equates to a 7.4% annualized rate of growth in the CPI-U.

FOMC Economic Projections

Participants in the June 15-16, 2021 FOMC meeting also made economic projections. The last two times they did this were during their March 2021 and December 2020 meetings. The table below presents FOMC members' median projections for several key economic variables in 2021, comparing their views at these three points in time. At all these meetings, participants also submitted forecasts for 2022, 2023, and the "longer run."

Select Federal Open Market Committee (FOMC) Economic Projections For 2021
Economic Variable June 2021 Median Projection March 2021 Median Projection December 2020 Median Projection
Real GDP Growth 7.0% 6.5% 4.2%
Unemployment Rate 4.5% 4.5% 5.0%
Personal Consumption Expenditures (PCE) Inflation 3.4% 2.4% 1.8%
Source: Federal Open Market Committee (FOMC)

As would be expected when GDP growth is accelerating and the unemployment rate is falling, upward pressure is being exerted on prices. The recent trend of FOMC forecasts, as summarized above, is in keeping with these typical relationships.

However, in line with their belief that the recent rise in inflation is largely due to "transitory factors," the median projection from the FOMC is that PCE inflation will fall from 3.4% in 2021 to 2.1% in 2022. This is in line with their view that real GDP growth will decline from 7.0% to 3.3%, while the unemployment rate holds steady at 4.5%.

Upcoming FOMC Meetings

The next two scheduled meetings of the FOMC are set for July 27-28, 2021 and September 21-22, 2021. Participants will present new economic projections at the latter meeting, but not at the former.

Article Sources

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  2. Federal Open Market Committee. "Federal Reserve issues FOMC statement, June 16, 2021." Accessed June 16, 2021.

  3. Federal Open Market Committee. "Summary of Economic Projections [June 16, 2021]." Accessed June 16, 2021.

  4. Yahoo Finance. "S&P 500 Index." Accessed June 16, 2021.

  5. Federal Open Market Committee. "Implementation Note issued June 16, 2021." Accessed June 16, 2021.

  6. Federal Open Market Committee. "Implementation Note issued April 28, 2021," Accessed June 16, 2021.

  7. U.S. Bureau of Labor Statistics. "Consumer Price Index - May 2021." Accessed June 16, 2021.

  8. Federal Open Market Committee, “Summary of Economic Projections [March 17, 2021].” Accessed June 16, 2021.

  9. Federal Open Market Committee. "2021 FOMC Meetings." Accessed June 16, 2021.

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