The Federal Reserve said Wednesday that it would maintain ultra-low interest rates and reaffirmed its commitment to other easing policies, but projected a rate hike in 2023 amid signs of a rapidly strengthening economic recovery and surging inflation.
The U.S. central bank, as widely expected, held the benchmark federal funds rate at a range between 0% and 0.25%, where it has been since March 2020, when COVID-19 forced an unprecedented shutdown of the nation's economy. The Fed will also keep purchasing $120 billion in bonds each month, a policy known as "quantitative easing" that's designed to keep credit cheap.
But updated economic projections released by the Fed show that officials expect to raise rates twice, to about 0.6%, by late 2023, sooner than they anticipated in March. At the time, the median official did not expect to move rates until 2024. Now, 13 of the 18 Fed officials at the meeting said they expect to start lifting rates sometime in 2023, while seven of the policymakers penciled in a rate hike as early as 2022.
"With economic activity running hot recently, they ultimately acknowledged that it may not be prudent to wait for the labor market to fully recover before the process of reducing accommodative policy begins," said Charlie Ripley, senior investment strategist for Allianz Investment Management.
Still, the Fed gave no signs that it was considering scaling back its aggressive bond-buying program, even though policymakers raised headline inflation expectations to 3.4% for 2021 – a full point higher than the March forecast.
Longer-term projections show that policymakers expect inflation to settle around 2% in the future, though Chairman Jerome Powell said during a press conference after the meeting that it "could turn out to be higher and more persistent than we expect."
Economists had speculated that central bank officials would start talking about tapering the bond-buying program that began in March 2020, leaving them to watch Powell's press conference for clues about when – and how quickly – policymakers expect to pare back the monetary support.
"I expect that we'll be able to say more about timing as we see more data, basically," Powell told reporters. "There's not a lot more light I can shed on that." He said the Fed would give markets plenty of advance notice before it begins to withdraw the support that began last year.
In their post-meeting statement, officials committed to maintaining support for the economy until "inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time" and "labor markets have reached levels consistent with the committee's assessment of maximum employment."
Policymakers met against the backdrop of deeply conflicting economic data: Although consumer prices are rapidly rising – surging 5% in May from a year prior, the fastest year-over-year jump since 2008 – job growth has been lackluster, missing Wall Street's expectations for two consecutive months. Concerns have grown recently that the labor market will be unable to return to pre-crisis levels without igniting inflation; according to estimates from the Dallas Federal Reserve, some 2.6 million people retired between February 2020 and April 2021.
"Why is the Fed remaining so accommodative in the face of higher inflation? They still believe inflation is transitory and notably, their unemployment forecasts were little changed since March," said Greg McBride, chief financial analyst at Bankrate. "So while the economy and inflation have revved up, in the eyes of the Fed their assessment of the job market is not much different now than it was in March."