Fed predicts earlier timeline for rate hikes with rising inflation
The Federal Reserve signaled Wednesday that it could act sooner than expected to start slowing down low interest rate policies that helped fuel a rapid rebound from the pandemic recession but which also coincided with a rise in the inflation.
Fed policymakers have predicted that they will double their short-term benchmark rate – which affects many consumer and business loans, including mortgages and credit cards – by the end of this year. 2023. They had previously estimated that no rate hike would take place before 2024.
Speaking at a press conference, President Jerome Powell said the Fed’s policy-making committee has also started discussing when to cut back on its monthly bond purchases. But Powell made it clear that the Fed has yet to decide when it will. The purchases, which consist of $ 120 billion in treasury bonds and mortgages, are aimed at keeping long-term rates low to encourage borrowing.
The Fed has made it clear that its first step in slowing its support for the economy would be to reduce its bond purchases – and that it would not start raising rates until soon after. Its key rate has been close to zero since March 2020.
The central bank‘s new forecast for rate hikes from 2023 reflects an economy growing faster than expected earlier this year.
At the same time, Powell sought Wednesday to allay any concerns that the Fed may be in a hurry to withdraw economic support by making borrowing more expensive. The economy, he said, still hasn’t improved enough to curb the pace of monthly bond purchases, which the Fed said it intends to continue until “further progress substantial “has been achieved towards its employment and inflation targets.
“We’re a long way from further substantial progress, we think,” Powell said at his press conference. âBut we are making progress.
Shortly after the Fed released its statement on Wednesday, US stocks fell further from their record highs and bond yields rose. The yield on the 10-year Treasury bill fell from 1.48% to 1.55%.
Sung Won Sohn, an economist at Loyola Marymount University in Los Angeles, suggested that the initially negative market reaction to the Fed’s statement may have prompted Powell to adopt a more conciliatory tone at his press conference. (“The doves,” in Fed parlance, generally focus on the Fed’s mandate to maximize employment and worry less about inflation. The “hawks,” on the other hand, tend to be concerned. more of the need to prevent high inflation.)
âWe received two different messages from the Fed today,â Sohn said. “The interest rate projections were a little more hawkish than the market expected.”
But at his press conference, Sohn said, Powell “pointed out that the economy is still not where it should be, especially in terms of unemployment … and the Fed still thinks the economy needs a boost. ‘be stimulated by the central bank “.
Yet Powell also sketched a broadly optimistic picture in his remarks on Wednesday. The inflation spikes of the past two months, he said, will likely prove temporary, and hiring is expected to accelerate throughout the summer and fall as COVID-19 recedes further with the increase in vaccinations. This will allow schools and daycares to reopen, allowing more parents to work, while additional federal assistance for the unemployed ends.
“There are all reasons,” said Powell, “to think that we will (soon) be in a labor market with very attractive numbers, low unemployment, high participation and rising wages at all levels. “.
His comments suggest that the Fed chairman is not worried that this spring’s hires, while strong, are below expectations. Powell had said in early spring that he would like to see a “string” of hiring reports showing about 1 million additional jobs each month. The job market has yet to hit that total in a month of this year, although employers have posted a record number of open jobs.
At the same time, inflation has risen much faster than Fed policymakers expected in March. Inflation jumped to 5% in May from the previous year, the largest 12-month increase since 2008.
The increase was due in part to a huge increase in used car prices, which have skyrocketed as semiconductor shortages have slowed vehicle production. Significantly higher prices for car rentals, plane tickets and hotel rooms were also major factors, reflecting pent-up demand as consumers shy away from the big purchases of goods that many of them had. performed while they were home to spend on services.
Powell has stuck to his long-held view that these spikes will only have a temporary impact.
âThe prices that drive higher inflation come from categories that are directly affected by the recovery from the pandemic and the reopening of the economy,â he said. âPrices that have been rising very quickly due to shortages and bottlenecks etc. should stop rising. And at some point, they should in some cases go down. ”
The central bank on Wednesday raised its inflation forecast to 3.4% by the end of this year, from 2.4% in its previous projection in March. Still, officials predict that price increases will remain moderate over the next two years.
Fed officials also expect the economy to grow 7% this year, which would be the fastest calendar-year expansion since 1984. They expect growth to slow down thereafter. , to 3.3% in 2022 and 2.4% in 2023.
Economists generally expect the Fed to continue discussing reducing its bond purchases, and then – by the end of August or September – to state precisely how and when that would begin. This would pave the way for a reduction in bond purchases that would actually start towards the end of this year or early 2022.
Another key consideration for the Fed is whether inflation persists long enough to affect public behavior. If Americans start to expect price increases, those expectations can trigger a self-fulfilling cycle as workers demand higher wages, which, in turn, can cause their employers to keep raising prices. to offset their higher labor costs.
Powell said measures of long-term inflation expectations have increased in recent months, after falling at the start of the pandemic. But most of them remain within a range consistent with the Fed’s 2% inflation target.
âIt’s gratifying to see them come out of their pandemic lows,â he said.