The Fed kept record low interest rates and its unprecedented bond-buying programme unchanged, but more officials now favour a rate hike by 2023.
As expected, the US central bank kept short-term interest rates anchored at between 0% and 0.25%, and continued its Treasury and asset-backed bond purchases of $120bn a month. The measures are aimed to support the US economic recovery from the downturn caused by the COVID-19 pandemic.
The so-called “dot plot” quarterly projections showed that Fed policymakers now expect to make two interest rate increases by the end of 2023. Seven officials now support the rate hike in 2022 – up from only four in March. In addition, 13 of 18 officials favour at least one rate increase by the end of 2023, up from seven in March. The projections had previously estimated that no rate hike would occur before 2024.
The Fed says it will aim to achieve “inflation moderately above 2% for some time so that inflation averages 2% over time, and longer-term inflation expectations remain well anchored at 2%”.
Gregory Daco from Oxford Economics says that the Fed’s “economic and median interest rate projections revealed a marginally less dovish stance.”
“The Fed expects a summer boom in activity and higher inflation through 2021, in line with our forecast. Inflation is also expected to be 'stickier' in 2022, and core and headline inflation are expected to moderately surpass the 2% target through 2023,” he says.
Policymakers said progress on vaccinations and strong policy support led to stronger economic activity and employment. "Amid this progress and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement. Inflation has risen, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to US households and businesses," the report says.
Growing inflation concerns
The Fed’s relaxed monetary policy stance comes despite the growing inflation concerns, with the US consumer prices index (CPI) jumping to 5% – the highest reading since August 2008 and well above the Fed’s target of 2%. The spike was largely driven by the increase in energy prices amid the reopening of the economy.
The core inflation, which excludes food and energy prices, had also surged to 3.8% – the highest level since June 1992. The biggest jump in this section was in used cars and trucks, which saw a price spike due to post-lockdown demand and a computer-chip shortage.
The Fed had previously reiterated the message that inflation is “transitory” in its nature, and is due to the low base effects from last year when the pandemic hit the economy.