According to the new economic forecast, Fed officials are expected to start raising interest rates in 2023, earlier than previously predicted. The forecast predicts that this year’s economic growth will accelerate and the inflation rate will rise sharply.
At the end of the two-day policy meeting on Wednesday, the U.S. central bank kept the main interest rate at the lowest range of 0% to 0.25%, which is the lowest level since the pandemic began.
But in March, when most Fed officials predicted that the current interest rate will be maintained at least until 2024, the consensus has shifted to an early interest rate hike in 2023, indicating that the central bank believes in a faster transition to a full recovery and tightening monetary policy. policy. The Fed’s forecast indicates that it is expected to raise interest rates at least twice in 2023.
The median estimate by Fed officials now predicts that this year’s GDP will grow by 7% compared to 6.5% in March, and the unemployment rate will fall to 4.5%, in line with earlier forecasts. The core inflation rate this year is expected to be 3%, much higher than the 2.2% expected in March, and then fall back to 2.1% in 2022.
The Federal Open Market Committee stated: “Progress in vaccination has reduced the spread of Covid-19 in the United States.” “With this progress and strong policy support, economic activity and employment indicators have increased. Adversely affected by the pandemic. The worst sectors are still weak, but have shown improvement.”
The Federal Open Market Committee maintained its Stable asset purchase US$120 billion per month-this is another feature of the unusually loose monetary policy introduced in response to the economic impact of the pandemic. Officials are expected to have preliminary talks on the timing and conditions for eventually starting to reduce the purchase of these bonds, but the statement did not mention the change.
The process of reducing the Fed’s debt purchases is called “gradual reduction” and may be discussed for months before action is taken. The Fed has stated that compared with last December, the economy must make “substantial further progress” before it can begin to reduce its extraordinary support for the economy.
The Fed emphasized that its monetary policy guidance is not based on the calendar, but on economic results. Specifically, it stated that interest rates will only be raised if the economy is at full employment and the inflation rate is 2% and is expected to exceed that level for a period of time. Nonetheless, while 7 of the 18 FOMC members are expected to raise interest rates for the first time in 2023 in March, 13 did so on Wednesday.
Since the last meeting of the FOMC in April, the U.S. stock market has risen, and borrowing costs have fallen from recent highs as investors bet that the Federal Reserve will continue to implement monetary stimulus policies, and this year’s Inflationary pressure It will be short-lived.
After the Fed’s announcement, US government bonds sold sharply, and the five-year US Treasury yield jumped 0.07 percentage points to about 0.85%.
The more policy-sensitive two-year Treasury bonds rose 0.02 percentage points to 0.18%, while the benchmark 10-year Treasury bonds fell more than 0.04 percentage points to 1.54%. This is lower than the recent highs in March, but is up from earlier this week. As prices fall, yields rise.
The Fed also announced on Wednesday that it will adjust two technical interest rates, including the payment of interest rates to banks on excess reserves held by the central bank. It increases the so-called IOER rate from 0.10% to 0.15%. It also agreed to pay more than zero fees for the reverse repurchase program and increase the interest rate to 0.05%.
Eligible money market funds and banks Yelling Keep funds at the Fed overnight because they have few viable, positive income places to invest in the large amounts of cash that have supported their coffers since the beginning of the year. The Fed said in a statement that these adjustments are aimed at supporting the “smooth operation of the short-term financing market.”