Federal Reserve officials held interest rates near zero while signaling they expect two increases by the end of 2023, pulling forward the date of liftoff and projecting a faster-than-anticipated pace of tightening as the economy recovers.
“Progress on vaccinations has reduced the spread of COVID-19 in the United States,” the Federal Open Market Committee said in a statement released Wednesday following the conclusion of its two-day policy meeting. “Amid this progress and strong policy support, indicators of economic activity and employment have strengthened.”
The central bank held the target range for its benchmark policy rate unchanged at zero to 0.25% — where it’s been since March 2020 —
and pledged to continue asset purchases at a $120 billion monthly pace until “substantial further progress” had been made on employment and inflation.
The dollar rose, stocks declined and yields on 10-year Treasuries jumped following the news.
“It’s a hawkish surprise,” said Thomas Costerg, senior U.S. economist at Pictet Wealth Management. “We are looking at a Fed that seems positively surprised by the speed of vaccinations and the ongoing withdrawal of social-distancing measures.”
“It’s almost like the Fed is carried away by the ongoing reopening euphoria,” he said.
The FOMC vote was unanimous. Chair Jerome Powell will hold a virtual press conference at 2:30 p.m. Washington time.
The quarterly projections showed 13 of 18 officials favored at least one rate increase by the end of 2023, versus seven in March. Eleven officials saw at least two hikes by the end of that year. In addition, seven of them saw a move as early as 2022, up from four.
The Fed marked up its inflation forecasts through the end of 2023. Officials see their preferred measure of price pressures rising 3.4% in 2021 compared with a March projection of 2.4%. The 2022 forecast rose to 2% from 2%, and the 2023 estimate was raised to 2.2% from 2.1%.
Consumer-price pressures have proven hotter than expected over the last two months. Labor Department figures showed a 0.8% jump in prices in April and a 0.6% rise in May, marking the two biggest monthly increases since 2009.
Labor Department reports on employment published since the last gathering of the U.S. central bank’s policy-setting Federal Open Market Committee in late April, on the other hand, have disappointed relative to forecasters’ expectations. The U.S. unemployment rate was still elevated at 5.8% in May, with total employment still millions of jobs below pre-pandemic levels.
Still, the FOMC median projection for unemployment in the fourth quarter of 2021 was unchanged at 4.5%, and the median estimate for the same quarter a year later was marked down to 3.8% from 3.9%. The 2023 forecast was held at 3.5%.
The U.S. economic recovery is gathering strength as business restrictions lift and social activity increases across the country. Robust demand from consumers and businesses alike has outstripped capacity, leading to bottlenecks in the supply chain, longer lead times and higher prices.
Fed officials have said such “fits and starts” are to be expected given the unprecedented nature of the pandemic and expressed optimism about the outlook for the second half of the year as more Americans get vaccinated.
The FOMC raised its projections for economic growth. Gross domestic product was seen expanding 7% this year, up from a prior projection of 6.5%. It maintained the 2022 expansion forecast at 3.3% and raised the 2023 estimate to 2.4% from March’s 2.2%.
