The Federal Reserve on Wednesday sharply raised its expectations for economic growth, but indicated that there are likely to be no interest rate hikes in 2023, despite improved prospects and a turnaround in this year to higher inflation.
As generally expected, the Federal Market Committee’s policy also voted to keep short-term lending rates near zero, while continuing an asset purchase program in which the central bank buys at least $ 120 billion worth of bonds per month.
The most important changes were how central bankers view the economic path forward and what impact this may have on policy.
“After a moderate pace of recovery, indicators of economic activity and employment have emerged recently, although the sectors most affected by the pandemic remain weak. Inflation is still below 2 percent,” the committee said in its post. said meeting statement.
Stocks responded positively to the news, with the Dow Jones industrial average averaging more than 200 points, while long-term government bond yields remained positive.
Gross domestic product is expected to increase by 6.5% in 2021 before cooling later, according to quarterly economic forecasts from members of the Federal Public Markets Committee. The average estimate represents an improvement from the expected 4.2% increase during the last round of projections in December.
Forecasts for 2022 and 2023 are for profit of 3.3% and 2.2% respectively before growth ends up in a long-term range of 2.3%.
Along with the increase in GDP, committee members predicted that unemployment would fall to 4.5% from the current 6.2% level. This compares with a 5% FOMC estimate in December. Forecasts for the next two years are for 4.2% and 3.7% before reaching a long-term level of 4%.
Expectations for core inflation have risen higher, and the committee is now looking for a 2.2% gain this year, measured by personal consumption expenditure. It is expected to drop to 2% in 2022 and then be higher to 2.1% next year, with the long-term expectation at 2%.
On the way in which the improvement will move the policy, the committee still expects interest rates to remain unchanged by 2023.
Fed Chairman Jerome Powell said he expected inflation to rise this year, partly due to soft comparisons between the previous year of the Covid-19 pandemic in early 2020. However, he said it would not be enough to does not change a policy that seeks to achieve inflation for longer than 2% if it helps to achieve full and inclusive employment.
“I would note that a short-term rise in inflation of more than 2% that is likely to occur this year will not meet this standard,” Powell said.
There was a slight hawkish tendency to the member’s expectations for rates, but not enough to change the forecast.
Four of the 18 FOMC members were looking for an interest rate hike in 2022, compared to just one at the December meeting, according to the “point plot” of individual members’ forecasts. For 2023, seven members see a hike compared to five in December.
Markets have been closely watching the projections in anticipation that the Fed might respond to the recent surge in economic growth and expectations of higher inflation. Market-based measures of inflation indicate a rate of 2.59% in five years, the highest level of the “break-even rate” in almost 13 years.
However, the Fed’s statement after the meeting continued to indicate that the policy will remain loose until significant further progress is made with the dual objectives of full employment and price stability.
In 2020, the Fed adjusted the targets to say that it will keep policies accommodating until employment not only increases significantly, but also in a way where the benefits are distributed among income, race and gender classes. To weaken with the target is the willingness to let inflation run above the Fed’s 2% target indefinitely for an indefinite period in order to reach the work target.
Recently, markets have become furious about concerns that inflationary pressures could pose a greater danger than the Fed thinks.
Government bond yields have risen to the levels last seen before the Covid-19 pandemic, as investors worry about inflation eroding the head of their fixed-income holdings. Inflation is bad for bonds because it means that future interest payments for holding the bonds are less valuable. Rising returns mean falling prices that occur when holders sell their bonds.
However, the Fed is comfortable with an increase in yields as long as they do so in response to economic growth. The Fed sees 2% inflation as a healthy level for the economy, while also giving the central bank room for policy. If inflation gets out of control, Fed officials believe they have the tools to control it.
In recent weeks, there has been some expectation in the market that the committee would be able to adjust the asset buying program to buy more long-term bonds to push rates out further, but there was no indication of that in Wednesday’s decision.