Federal Reserve officials raised expectations on when they would first raise interest rates from the lowest on Wednesday, a sign that a healing labor market and rising inflation were giving to policy makers the assurance that they would achieve their goals of full employment and stable prices in the years to come. .
Fed policymakers now plan to make two interest rate hikes by the end of 2023, the central bank’s updated summary of economic projections showed on Wednesday. Previously, the median official predicted rates would stay at their lowest – where they have been since March 2020 – at least until 2024.
Fed Chairman Jerome H. Powell will deliver prepared remarks and answer questions from reporters in a webcast starting at 2:30 pm.
“Progress on vaccinations has reduced the spread of Covid-19 in the United States”, the Fed said in a press release released following its June 15-16 political meeting, a meeting that took several upbeat revisions. “Advances in immunization are likely to continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain. “
Economic data has offered a series of surprises since the Fed met in end of April, and since its last release economic projections in March. Inflation data has arrived faster than officials expected, and consumer and market expectations for future inflation have risen. Employers hired slower than in the early spring as vacancies abound, but workers are taking time to access them.
The Fed continued to call this largely “transient” rise in inflation in its new statement. He has consistently been committed to taking a patient approach to monetary policy as the economic environment changes rapidly.
Its main policy interest rate, the federal funds rate, has been set near zero since March 2020, helping to keep borrowing cheap for households and businesses. The Fed also buys $ 120 billion in government-guaranteed bonds each month, which keeps long-term borrowing costs low and can bolster the prices of stocks and other assets. These policies work together to make money flow smoothly through the economy, fueling stronger demand that can help accelerate growth and recovery in the labor market.
Authorities have pledged to continue supporting the economy until the pandemic shock is far behind the United States. Specifically, they said they wanted to make “substantial” progress towards their two economic goals – maximum employment and stable inflation – before slowing down their bond purchases. The bar for raising interest rates is even higher. Officials said they wanted the labor market to return to full strength and inflation to be on track to average 2% over time before raising interest rates off the floor.
Based on new central bankers’ projections released on Wednesday, the Fed’s median official expects to meet those targets by the end of 2023. The dot plot of the Fed’s interest rate projections showed that more half of its 18 officials expect rate hikes by the end of this year. More, but not quite half, expected one or two increases in 2022.
Fed officials also changed their economic estimates. They now see an average inflation of 3.4% in the last three months of 2021.
Wall Street is eager to hear the latest inflation assessment from the Fed, which has also become a major topic in Washington as the White House insists higher prices are likely to fade, but Republicans denounce them as a sign of economic mismanagement. Ever higher inflation could make it harder for Democrats to advocate for additional spending on priorities like infrastructure, even if the suggested spending would trickle down over time.
“The current explosion in inflation that we have seen reflects the difficulties of reopening an economy that has been shut down,” said Janet Yellen, Secretary of the Treasury, in response to questions from lawmakers during testimony before the committee Senate Finance earlier Wednesday.
Alan Rappeport contributed reporting.