The Federal Reserve on Wednesday kept benchmark interest rates near zero, but signaled that a rate hike could come sooner than expected, and significantly lowered its economic forecast for this year.
Besides those largely expected moves, officials at the FOMC policy-making have indicated that they will begin to roll back some of the stimulus that the central bank provided during the financial crisis. However, there was no definite indication of when that could happen.
“If broad-based progress continues as expected, the committee considers that moderation in the pace of asset purchases may soon be warranted,” the FOMC statement said after the meeting. Participants in a recent CNBC poll said they expect to announce a reduction in bond purchases in November and begin in December.
Fed Chairman Jerome Powell, in his post-meeting press conference, said the committee was ready to act.
“Although no decisions were made, participants generally felt that as long as the recovery remains on track, a tapering process ending in the middle of next year is likely to be appropriate,” he said.
For now, the committee has voted unanimously to keep short-term interest rates steady near zero.
However, more members now see the first rate hike happen in 2022. In June, when members released their latest economic forecasts, a slight majority put that increase in 2023.
Powell said the Fed was close to meeting its targets for “more significant progress” on inflation and employment.
“For inflation, it looks like we’ve made more than one big advance, another big advance,” he said. “This part of the test was achieved in my view and the opinion of many others.”
“My own view is that it is the test for more significant progress in employment,” Powell added.
Markets pared some of their gains after the Fed news initially, with major equity averages continuing to show solid gains and government bond yields mixed.
There have been some substantial changes in the Federal Reserve’s economic outlook, with lower growth expectations and higher inflation expectations.
The committee now expects GDP to rise just 5.9% this year, compared to a 7% forecast in June. However, growth in 2022 is now set at 3.8%, compared to 3.3% previously, and 2.5% in 2023, a tenth of a percentage point increase.
Expectations also indicated that FOMC members see inflation stronger than expected in June. Core inflation is expected to rise 3.7% this year, compared to a forecast of 3% the last time members submitted their forecasts. Officials then see inflation at 2.3% in 2022, compared to the previous forecast of 2.1%, and 2.2% in 2023, a tenth of a percentage point higher than the June forecast.
Including food and energy, officials expect inflation to reach 4.2% this year, up from 3.4% in June. The next two years is expected to ease to 2.2%, with little change from the June forecast.
In another move, the Fed said it would double the level of daily market repurchases to $160 billion from $80 billion.
Markets had been expecting little in terms of key decisions from the meeting, but were partly nervous about when the Fed would start reducing the pace of its monthly bond purchases.
Powell said during the Federal Reserve’s annual symposium in August in Jackson Hole, Wyoming, that he and others were on the position that the central bank had met its inflation target and could start lowering the $120 billion per month minimum purchases of Treasuries and backed securities. with mortgage. .
Investors were also looking forward to the meeting to find out where Fed officials stand on inflation expectations.
The Fed’s preferred measure of inflation – the personal consumption expenditures index minus food and energy prices – accelerated 3.6% in July, the highest level in 30 years. However, Powell has repeatedly said he expects price pressures to ease as supply chain factors, commodity shortages and unusually high levels of demand return to pre-pandemic levels.
The unemployment forecast has been more pessimistic, with the year-end unemployment rate now at 4.8%, from the current 5.2% and June estimate of 4.5%. This comes on the heels of the disappointing August jobs report which showed job growth of only 235K.
However, Powell said it wouldn’t take huge job numbers to get the Fed to start removing the accommodative policy.
“For me, it wouldn’t take a knockout, a great and very powerful employment report. It would take a reasonably good employment report for me to feel that this test had been met. Others on the committee, many of them on the committee, feel that the test is the one we met Already. And others want to see more progress.”
Correction: An equal number of FOMC members see a rate hike in 2022 as those who don’t, although the central trend is included as an increase next year in the Fed’s Summary of Economic Outlook. A previous version mischaracterized the individual expectations of the committee members. An incorrect number has also been provided for GDP estimates for 2023.
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