Federal Reserve officials plan to start raising interest rates in 2023, sooner than expected, according to new economic projections that predicted faster growth and significantly higher inflation this year.
At the end of its two-day policy meeting on Wednesday, the US central bank kept its main interest rate in the lowest range of 0 to 0.25%, where it has been since the start of the pandemic.
But while in March, when most Fed officials predicted current rates would be held until at least 2024, the consensus shifted to an earlier take-off in 2023, signaling the bank’s conviction central into a faster transition to full recovery and monetary policy tightening. The Fed’s projections indicate that at least two rate hikes are expected in 2023.
The median estimate by Fed officials is now forecasting gross domestic product growth of 7% this year, down from 6.5% in March, with the unemployment rate falling to 4.5%, in line with earlier forecasts. Core inflation is expected to be 3% this year, well above the 2.2% expected in March, before falling back to 2.1% in 2022.
“Advances in vaccinations have reduced the spread of Covid-19 in the United States,” the Federal Open Market Committee said. “Amidst this progress and strong political support, economic activity and employment indicators have strengthened. The sectors most affected by the pandemic remain weak but have shown improvement. ”
The FOMC on Wednesday maintained its stable asset purchases to $ 120 billion per month – another feature of the exceptionally loose monetary policy introduced to combat the economic fallout from the pandemic. Officials are expected to have had initial discussions on the timing and terms of a possible decision to start scaling back those bond purchases, but the statement makes no mention of a change.
The process of reducing the Fed’s debt purchases, known as “tapering,” could be debated for months before a decision is made. The Fed said the economy is expected to make “further substantial progress” from last December in order to start reducing its extraordinary support to the economy.
The Fed stressed that its monetary policy stance is not based on a timetable but depends on economic performance. Specifically, he said he would only raise interest rates if the economy was at full employment with inflation at 2 percent and on track to exceed that level for some time. Nonetheless, while seven of the 18 FOMC members predicted a first interest rate hike in 2023 in March, 13 did so on Wednesday.
Since the last FOMC meeting in April, U.S. equity markets have rallied, as borrowing costs have fallen from recent highs as investors bet that the Fed will maintain its monetary stimulus and that inflationary pressures will be transient.
US government bonds sold sharply after the Fed’s announcement, as the yield on five-year Treasuries jumped 0.07 percentage points to around 0.85%.
The more policy-sensitive two-year note traded 0.02 percentage point higher at 0.18 percent, while the benchmark 10-year note jumped more than 0.04 percentage point at 1.54 percent. That’s lower than recent highs seen in March, but higher than at the start of the week. Yields increase as prices fall.
The Fed also announced Wednesday that it would adjust two technical rates, including the rate it pays banks on excess reserves they hold at the central bank. He raised the so-called IOER rate to 0.15 percent, from 0.10 percent. He also agreed to pay more than zero on the reverse repo program, raising the rate to 0.05%.
Money market funds and eligible banks have claimed to hide money overnight from the Fed as they have few viable, positive-return places to invest the huge amounts of money that have bolstered their coffers since the start of the year. The Fed said in a statement that the adjustments were aimed at supporting “well-functioning short-term funding markets.”