"As the reopening continues, shifts in demand can be large and rapid and bottlenecks, hiring difficulties and other constraints could continue to limit how quickly supply can adjust, raising the possibility that inflation could turn out to be higher and more persistent than we expect," Powell said during a Wednesday press conference following the central bank's two-day policy-setting meeting.
Updated economic projections released by the Fed show that officials dialed up their inflation expectations for the year, raising the headline forecast to 3.4% for 2021 – a full point higher than the March estimate. Longer-term projections show that policymakers expect inflation to settle around 2% in the future.
Fed policymakers also penciled in an earlier-than-expected interest rate hike: Forecasts show that a majority of officials are anticipating at least two rate hikes in 2023, sooner than they anticipated in March. At the time, the median official did not expect to move rates until 2024.
Officials also discussed an eventual tapering of the central bank's bond-buying program, although Powell gave no indication during the press conference of when that may occur. He said the Fed would give markets plenty of advance notice before it begins to withdraw the monetary support that began last year.
"I expect that we'll be able to say more about timing as we see more data, basically," he told reporters. "There's not a lot more light I can shed on that."
Officials voted unanimously to hold 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.
The Fed reiterated that it expects to continue bond purchases until "substantial further progress" has been made in the recovery.
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."