Fed to Hike Rates Early in 2023, Raises Inflation Projection

Mandatory Credit: Photo by Susan Walsh/AP/Shutterstock (11826552a)Federal Reserve Chairman Jerome Powell, right, testifies before the Senate Banking Committee on Capitol Hill in Washington.
Susan Walsh/AP/Shutterstock / Susan Walsh/AP/Shutterstock

The Federal Reserve concluded its much-anticipated Federal Open Market Committee meeting today, saying it would keep rates steady until 2023, albeit planning to raise them earlier in the year. It also significantly raised its inflation forecast and reiterated what was said at the previous meeting, that “the path of the economy will depend significantly on the course of the virus.”

See: The Fed Speaks on Interest Rates, Still Wants to Keep Them Low
Find: What Does the Fed Do, Anyway?

“Progress on vaccinations has reduced the spread of COVID-19 in the United States. Amid this progress and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement. Inflation has risen, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses,” reads the committee’s press release of today’s announcement.

According to meeting participants’ projections, inflation forecast is up 3.4% from 2.4% in March, based on data released today.

“The Fed’s reaction is appropriate, they acknowledged the inflation reports,” Jay Hatfield, founder and CEO of Infrastructure Capital and portfolio manager of PFFA, tells GOBankingRates. “The market seemed irrationally resilient but now with the Fed’s statement, people will realize that inflation is high, and it seems like it’s accelerating not decelerating.”

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Projections indicate that rates are expected to go up to 0.6% earlier than previously announced in 2023 and then jump to 2.5% “in the longer run.”

The committee also increased its GDP forecast, projecting it to grow 7% in 2021, compared with the 6.5% projected in March, as well as its 2023 forecast, projecting GDP of 2.4% from 2.2% in March.

Unemployment rate projections are 4.5% for December 2021, 3.9% for December 2022 and 3.5% for December 2023, according to the Fed.

See: JOLTS Report Shows 9.3 Million Jobs Added As Quits Hit Record High
Find: Prices Surge 5% as Inflation Rises with No End in Sight – May’s Consumer Price Index, By the Numbers

In addition, treasury securities holdings will continue to increase by at least $80 billion per month and agency mortgage-backed securities by at least $40 billion per month “until substantial further progress has been made toward the committee’s maximum employment and price stability goals.”

Speaking at a press conference following the announcement today, Federal Reserve Chair Jerome Powell said that the rate increases are “not the focus of the committee,” reiterating previous statements that hikes will be “outcome-based, not time-based hiked, when inflation is at 2% and on track.”

He added that the main message is that the Fed is comfortable that economic conditions will be met sooner than previously anticipated and that this is a “welcomed development.”

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About the Author

Yaël Bizouati-Kennedy is a former full-time financial journalist and has written for several publications, including Dow Jones, The Financial Times Group, Bloomberg and Business Insider. She also worked as a vice president/senior content writer for major NYC-based financial companies, including New York Life and MSCI. Yaël is now freelancing and most recently, she co-authored  the book “Blockchain for Medical Research: Accelerating Trust in Healthcare,” with Dr. Sean Manion. (CRC Press, April 2020) She holds two master’s degrees, including one in Journalism from New York University and one in Russian Studies from Université Toulouse-Jean Jaurès, France.

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