The Fed stabilizes interest rates but raises inflation expectations significantly

The Federal Reserve Board of Governors on Wednesday significantly raised expectations for inflation this year, and hastened the time to raise interest rates next.

However, the central bank did not say when to start cutting aggressive bond purchase programs, but Federal Reserve Board Chair Jerome Powell said authorities would discuss the issue at a meeting. I admitted that.

Powell recalled that the Fed “did not think about raising rates” a year ago, “this meeting we held can be thought of as a’discussion’meeting.” Said.

As expected, the Federal Open Market Committee unanimously kept benchmark short-term borrowing rates close to zero. However, officials said there could be a rate hike in 2023 after saying in March that there was no rise until at least 2024. The so-called dot plot of individual member expectations showed two increases in 2023.

The Federal Reserve has raised its headline inflation forecast to 3.4%, which is completely higher than the March forecast, but post-meeting statements continue to state that inflationary pressures are “temporary.” .. High expectations are in the midst of the biggest consumer price inflation in about 13 years.

“This is not what the market expected,” said James McCann, Deputy Chief Economist at Aberdeen Standard Investments. “The Fed now shows that interest rates need to rise faster and faster, suggesting two rate hikes in 2023. This change in stance suggests that the recent surge in inflation is temporary. It’s a bit inconsistent with the Fed’s recent claim that it’s something like that. “

The market responded to Fed news and Stock price falls And the yield of government bonds will be high.

Even if this year’s forecast is raised, the Commission expects inflation to reach its 2% target in the long run.

“Our expectations are that these high inflation rates will now weaken,” Powell said in a press conference after the conference.

However, Powell said some of the dynamics associated with the resumption “increased the likelihood that inflation will turn out to be higher than expected and more sustainable.”

Powell said progress towards the Fed’s dual employment and inflation goals is happening somewhat faster than expected. He paid particular attention to the rapid recovery in growth in 2021, when the Fed sees GDP as 7%.

“Most of this rapid growth reflects a continued recovery of activity from depressed levels, and while the factors more affected by the pandemic remain weak, they show improvement,” he said. ..

Authorities have raised this year’s GDP forecast from the previous 6.5% to 7%. The unemployment rate estimate remained unchanged at 4.5%.

This statement softened some of the words of previous statements since the Covid-19 crisis. Since last year, the FOMC has stated that the pandemic “causes tremendous human and financial difficulties in the United States and around the world.”

Instead, Wednesday’s statement said, “Economic activity and employment indicators have been strengthened. The sectors most adversely affected by the pandemic remain weak, but show improvement,” and vaccination against the disease. Mentioned progress.

Investors have carefully watched statements about how Fed officials see the economy expanding rapidly since the severity of the 2020 pandemic crisis.

Recent indicators show, in some respects, that the United States is expanding at the fastest rate since World War II. But that growth has been accompanied by inflation, and central banks are being pressured by a variety of sources to begin cutting at least $ 120 billion in bond purchases each month.

At a post-conference press conference, Fed officials said they had “discussed” progress towards inflation and employment goals related to asset purchases and will continue to do so in the coming months. It’s a schedule.

The market was looking for the possibility of the Commission working on open market operations to provide short-term funding to financial institutions. The so-called overnight repo transaction, in which banks exchange high-end collateral for reserves, has recently seen record demand as financial institutions seek yields that exceed the negative interest rates found in some markets.

The Commission has increased the interest paid on excess reserves by 5 basis points to 0.15%.

On another issue, the FOMC has announced that it will extend its dollar swap line with the world’s central banks by the end of the year. The monetary program is one of the last remaining Covid-era initiatives the Fed has taken to keep the global market flowing.

Become a smarter investor CNBC Pro..
Get stock selection, analyst phone calls, exclusive interviews, and access to CNBCTV.
Sign up and get started Free trial today..

The Fed stabilizes interest rates but raises inflation expectations significantly

Source link The Fed stabilizes interest rates but raises inflation expectations significantly

Back to top button