Fed holds rates steady, but raises inflation expectations sharply and sees hikes in 2023

The Federal Reserve on Wednesday considerably raised its expectations for inflation this year and brought forward the time frame on when it will next raise interest rates. However, the central bank gave no indication as to when it will begin cutting back on its aggressive bond-buying program. As expected, the policymaking Federal Open Market Committee unanimously left its benchmark short-term borrowing rate anchored near zero. But officials indicated that rate hikes could come as soon as 2023, after saying in March that it saw no increases until at least 2024. The so-called dot plot of individual member expectations pointed to two hikes in 2023.

Though the Fed raised its headline inflation expectation to 3.4%, a full percentage point higher than the March projection, the post-meeting statement continued to say that inflation pressures are “transitory.” Markets reacted to the Fed news, with stocks falling and government bond yields higher. Even with the raised forecast for this year, the committee still sees inflation trending to its 2% goal over the long run.

But Powell said that some of the dynamics associated with the reopening are “raising the possibility that inflation could turn out to be higher and more persistent than we anticipate.” Officials raised their GDP expectations for this year to 7% from 6.5% previously. The unemployment estimate remained unchanged at 4.5%. The statement tempered some of the language of previous statements since the Covid-19 crisis. Since last year, the FOMC had said the pandemic was “causing tremendous human and economic hardship across the United States and around the world.”

Fed holds rates steady, but raises inflation expectations sharply and sees hikes in 2023, CNBC, Jun 17