Fed lifts estimates for US economic growth and employment as vaccination speeds up

Federal Reserve
  • The Fed boosted its estimates for economic growth in its projections since December.
  • US GDP is forecasted to grow 6.5% this year, up from the prior estimate of 4.2%.
  • The Fed also sees the unemployment rate sinking to 4.5% by the end of 2021.
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Federal Reserve policymakers boosted their projections for the US economic recovery on Wednesday as new stimulus and vaccine rollouts pave the way for a summer reopening.

The Federal Open Market Committee’s median estimate for 2021 gross domestic product growth rose to 6.5% this year, and 3.3% for 2022. That compares to the previous forecasts of 4.2% and 3.2%, respectively. The unemployment rate is now expected to dip to 4.5% this year, an improvement from the prior forecast of 5%.

The FOMC released its quarterly summary of economic projections following the second day of its March meetings. The central bank elected to hold interest rates at historic lows and maintain its pace of asset purchases at $80 billion in Treasurys and $40 billion in mortgage-backed securities per month.

The estimates are the first to be published since December, and therefore are the first to include the impact the $900 billion stimulus package passed late last year, the $1.9 trillion plan signed earlier this month, and the improved pace of vaccination. The developments have all been viewed as major boons to the economic rebound and prompted several economists to lift their own growth forecasts.

The nation’s fight against the coronavirus has also shifted significantly since the December FOMC meeting. Daily case counts surged to a peak above 300,000 in early January but have since tumbled to around 50,000 as distancing measures and vaccination curbs the pandemic’s spread.

New stimulus has been criticized by Republicans for risking runaway inflation through the recovery. Fed officials have countered such concerns in recent weeks. Jerome Powell has repeatedly said that, although reopening and stimulus can produce a quick jump in inflation, the effect will likely be temporary and give way to a similarly sharp decline.

The FOMC’s latest estimates reflect such an outlook. Members see personal consumption expenditures inflation – the Fed’s preferred price-growth gauge – reaching 2.4% in 2021, up from the previous 1.8% estimate. Inflation will then fall to 2% in 2022 and reach 2.1% the following year.

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‘Flood gates are about to open’: Bank of America just boosted its forecast for 2021 US GDP growth for these 3 reasons

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The IMF said vaccines would help the US economy recover sharply in 2021

  • The US economy is set for “stellar” economic growth in 2021, Bank of America said in a note on Monday.
  • The bank increased its 2021 US GDP growth estimate to 6.5% from 6.0% as it has become “more convinced” that the economy is set for a rebound after the COVID-19 pandemic.
  • Detailed below are the three reasons why Bank of America just increased its 2021 US GDP growth forecast.
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The US economy will experience “stellar” growth in 2021 as the COVID-19 pandemic subsides, Bank of America said in a note on Monday.

The bank increased its 2021 US GDP growth estimate to 6.5% from 6.0% as it has become “more convinced” that the consumer will get out and spend this year, the note said. The bank also sees heightened economic growth extending into next year, bumping its 2022 GDP growth estimate to 5.0% from 4.5%.

Here are the three reasons guiding Bank of America’s decision to increase its economic growth forecast, according to the note.

1. A larger fiscal stimulus package.

Congressional Democrats are pushing for a $1.9 trillion stimulus package that is scheduled to be voted on next month. But there is still work to be done on the bill, and some provisions proposed in the legislation will hit road blocks, BofA said.

“We now think that the bill will total $1.7 trillion, up from our prior assumption of $1 trillion. Not all provisions will hit the economy right away and we expect that $1.2 trillion of monies will hit this year with the rest spilling into next year and beyond,” BofA said, adding that the “flood gates are about to open.”

2. Better news on the virus front.

The recent news on the virus front has been “unambiguously positive,” BofA said, pointing to virus cases being down 72% from the January peak, with hospitalizations following closely behind. This encouraging data should help tightly locked down states like New York and California ease restrictions.

“Vaccinations are running at a faster-than-expected-rate, which should pull forward the timeline for successful reopening of the economy. This will help to unleash demand for leisure and other COVID-sensitive services even earlier than previously anticipated,” BofA said.

3. Encouraging economic data. 

Consumers quickly put their stimulus checks to work in December, with exceptionally robust retail sales data leading BofA to boost its first quarter GDP tracking estimate to 5.5%. A recovery in manufacturing has also materialized at a rapid pace as the housing market booms, evidenced by recent building permits data.

“The goods side of the economy is still riding high while the services side is waiting with bated breath to participate. We expect the economy to accelerate further in the spring and really come to life in the summer,” BofA said. 

The biggest downside risk to BofA’s estimates? If the virus curve steepens again, resulting in a fourth wave, according to the note, which added that it does not expect a rise in inflation will lead the Fed to hike interest rates too early. 

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Stocks are vulnerable to a near-term pullback as the market overestimates a 2021 recovery, CFRA says

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A trader works on the floor at the New York Stock Exchange (NYSE) in New York, U.S., February 28, 2020.

  • Investors should brace for a near-term pullback in the first quarter of 2021, according to CFRA’s Sam Stovall. 
  • Domestic equity markets appear to us to have over-discounted a second-half 2021 economic and EPS recovery…and as a result may be vulnerable to a Q1 pullback,” the chief investment strategist said in a note to clients on Wednesday.
  • Stovall also sees the S&P 500 reaching 4080 by the end of 2021, a 9.5% upside from current levels.
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Investors should brace for a near-term pullback in the first quarter of 2021, according to CFRA’s Sam Stovall. 

Positive vaccine news has left many investors hopeful that the economy will reopen and recover during the summer of 2021. Stovall explained that the market now is showing signs that investors are overestimating a recovery in the economy and earnings in the second half of 2021. 

“Domestic equity markets appear to us to have over-discounted a second-half 2021 economic and EPS recovery…and as a result may be vulnerable to a Q1 pullback,” the chief investment strategist said in a note to clients on Wednesday. 

Read more: JPMorgan unveils its 50 ‘most compelling’ stock picks to buy for 2021 – and details why each one will be a top performer

Stovall noted that the Russell 2000 is currently more than 30% above its 200-day moving average, and the 12-month return differential for the S&P 500 growth-value indices remains at a level not seen since December 1999, shortly before the “Dotcom” bubble burst. 

However, the chief strategist sees the S&P 500 gaining 9.5% in 2021. He reiterated his 12-month price target for the benchmark index of 4080, a sign that 2021 will be a positive year for stocks.

Stovall recommends investors stay overweight consumer discretionary stocks, health care, industrials, and materials. He recommends investors are underweight utilities, real estate, and consumer staples.

Read more: Wall Street’s biggest firms are warning that these 7 things could crash the stock market’s party in 2021

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