Fed expects rate hikes can hold off until at least next year

The Federal Reserve left interest rates near zero Wednesday and said it would continue to use all the tools in its arsenal to support the still bouncing-back US economy.

But it struck a somewhat more hawkish tone in its monetary policy update, saying it is prepared to “adjust the stance of monetary policy as appropriate if risks emerge.”

One of these risks could be a spike in inflation, which the Fed expects will move higher, albeit temporarily, in the coming months. Other risks could be public health, labor market and financial market conditions.

By December, price increases will be at 2.4%, Fed officials predicted — higher than their December estimate of 1.8% and slightly ahead of the central bank’s target of around 2%.

But that’s no reason to worry, according to the central bank, which expects the price increases to be transitory.

Investors are concerned that the Fed will be forced to raise interest rates faster than hoped to respond to spikes in inflation. Treasury bond yields have been rising against the backdrop of this thesis, climbing to a 13-month high of 1.67% Wednesday. The ascent in yields took a breather following the central bank’s announcement.

In response, stocks rallied to fresh record highs and the Dow closed above 33,000 points for the first time ever.

According to the Fed’s consensus forecast — known as dot plot — the central bank doesn’t expect any rate hikes in 2021, but four Fed officials project higher interest rates in 2022.

For now, the benchmark interest rate remains unchanged in the range of zero to 0.25%.

The Fed is also not ready to start thinking about thinking about ending its asset purchases.

“We’ve said that we would continue asset purchases at this pace until we see substantial further progress. And that’s actual progress, not forecast progress,” Powell said.

Some progress will likely probably become visible soon.

Fed officials projected US gross domestic product, the broadest assessment of economy activity, will climb 6.5% this year, more than the 4.2% projected in December. The vaccine rollout, along with the boost from Washington’s fiscal stimulus packages, are responsible for the bright economic future.

Meanwhile, the unemployment rate is expected to fall to 4.5% by year-end, compared with the previous forecast of 5%. As of February, the nation’s jobless rate stood at 6.2%.

That said, Powell reiterated once again that the overall unemployment rate does not reflect the total number of people who have stopped working because of the pandemic, including those who dropped out of the labor force. Last month’s jobs report also underscored the racial divergences in the unemployment rate, with the rates for people of color significantly above the White jobless rate.

“It’s sad to see,” Powell said during the press conference. “And this particular downturn, of course, was just a direct hit on a part of the economy that employs many minorities and lower-paid workers.

By 2023, the jobless rate will be back down at 3.5%, according to the Fed consensus, the same rate the job market was at before the pandemic hit.