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Fed signals rate hikes for 2023, start of bond-buying taper talks

The Federal Reserve on Wednesday brought forward its projections for the first post-pandemic interest rate hikes into 2023 and opened the debate on when and how it may be appropriate to start tapering the U.S. central bank's massive bond-buying program.

Citing an improved health situation and the role of vaccinations in limiting the spread of the coronavirus, the Fed's latest policy statement also dropped a longstanding reference to the pandemic being a drag on economic growth.

Fed Chair Jerome Powell, speaking to reporters after the end of a two-day policy meeting, said officials started "talking about talking about" tapering the central bank's $120 billion in monthly asset purchases, which officials said would continue until "substantial further progress" has been made toward the central bank's maximum employment and 2% inflation goals.

"In coming meetings, the committee will continue to assess the economy’s progress toward our goals," Powell said, referring to the policy-setting Federal Open Market Committee.

He declined to offer guidance on the timing for any future policy shift, emphasizing that more economic progress is needed before the "substantial further progress" standard is met.

Powell also made it clear the central bank would communicate with markets and the public before making a policy shift. "We will provide advance notice before announcing any decision to make changes to our purchases," he said.

Economic Projection

The Federal Reserve now forecasts at least two rate hikes by the end of 2023

The Federal Reserve now sees at least two interest rate hikes in 2023, according to the central bank’s so-called dot plot of projections.

Wednesday’s forecast showed 13 members of the Federal Open Market Committee believe the Fed will increase rates in 2023 and the majority of them believe the central bank will hike at least twice that year. Only five members still see the Fed staying pat through 2023. In fact, seven of the 18 members see the Fed possibly increasing rates as early as 2022.

 

The “longer run” dots remained unchanged from the FOMC’s March meeting.

The Fed also slightly dialed up its economic expectations for 2021, according to its Summary of Economic Projections released Wednesday.

The central bank now expects real gross domestic product to grow 7.0% in 2021, compared with the 6.5% forecast from its March meeting. The Fed also upped its 2023 real GDP forecast to 2.4% from 2.2% expected previously.

The Fed also sharply increased its inflation forecasts for the year. It now sees inflation running to 3.4% this year, above its previous estimate of 2.4%. The central bank also slightly hiked its PCE inflation estimates for 2022 and 2023.

Core PCE inflation is expected to come in at 3.0% in 2021, up from March’s forecast of 2.2%. Core PCE for 2022 is now expected at 2.1% and is projected to stay at that level in 2023.

The Fed still estimates the unemployment rate will fall to 4.5% in 2021. The FOMC expects the rate to drop to 3.8% and 3.5% in 2022 and 2023, respectively.

The Fed moves up its timeline for rate hikes as inflation rises

The Federal Reserve on Wednesday considerably raised its expectations for inflation this year and brought forward the time frame on when it will next raise interest rates.

However, the central bank gave no indication as to when it will begin cutting back on its aggressive bond-buying program, though Fed Chairman Jerome Powell acknowledged that officials discussed the issue at the meeting.

As expected, the policymaking Federal Open Market Committee unanimously left its benchmark short-term borrowing rate anchored near zero. But officials indicated that rate hikes could come as soon as 2023, after saying in March that it saw no increases until at least 2024. The so-called dot plot of individual member expectations pointed to two hikes in 2023.

Though the Fed raised its headline inflation expectation to 3.4%, a full percentage point higher than the March projection, the post-meeting statement continued to say that inflation pressures are “transitory.” The raised expectations come amid the biggest rise in consumer prices in about 13 years.

Markets reacted to the Fed news, with stocks falling and government bond yields higher as investors anticipated tighter Fed policy ahead, including the likelihood that the bond purchases will slow as soon as this year.

Reference: CNBC, Reuters