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Fed keeps rates stable, but sharply raises inflation expectations and makes no mention of a cut

On Wednesday, the Federal Reserve sharply raised its inflation expectations this year and brought forward the timing of the next interest rate hike.

However, the central bank has given no indication of when it will start cutting its aggressive bond-buying program, leaving investors to watch President Jerome Powell’s press conference on signs of the start of the cut.

As expected, the Federal Open Market Policy Committee left its benchmark short-term borrowing rate near zero. But officials have indicated that rate hikes could come as early as 2023, after saying in March that there was no increase until at least 2024. The so-called dot chart of individual members’ expectations showed two increases in 2023.

Although the Fed raised its headline inflation expectations to 3.4%, a percentage point higher than the March projection, the post-meeting statement continued to say that inflationary pressures are “transient.”

Even with the forecast for this year, the committee still sees inflation heading towards its 2% long-term target.

Officials have raised their GDP expectations for this year to 7% from 6.5% previously. The unemployment estimate remained unchanged at 4.5%.

The statement has tempered some of the language of previous statements since the Covid-19 crisis. Since last year, the FOMC had said the pandemic “was causing enormous human and economic hardship in the United States and around the world.”

Instead, Wednesday’s statement noted the progress made by vaccinations against the disease, noting that “indicators of economic activity and employment have strengthened. Sectors most affected by the pandemic remain weak but have improved. “.

Investors were watching the meeting closely for statements on how Fed officials view a rapidly expanding economy from the depths of the pandemic crisis in 2020.

Recent indicators show that in some ways the United States is developing at the fastest pace since World War II. But that growth has also come with inflation, and the central bank has come under pressure from various sources to at least start cutting bond purchases by at least $ 120 billion that it makes each month.

The statement after the meeting did not address the issue. Powell will certainly be asked about this during his press conference, which begins at 2:30 p.m. ET.

The markets were looking for the possibility of the committee looking after its open market operations where it provides short-term funding to financial institutions. So-called overnight repo transactions, where banks swap high-end collateral for reserves, have seen record demand in recent times as institutions seek a return above the negative rates seen in some markets.

The committee was expected to increase the interest it pays on excess reserves in order to ease the pressure on the markets.

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