Fed forecast: higher interest rates from 2023 as inflation rises

Fed chief Jerome Powell
Photo Reuters

In the short term, interest rates in the United States will not rise from just above 0 percent. But interest rate increases are to be expected from 2023. That is the message that the Federal Reserve, the US central bank, gave on Wednesday after a board meeting. At its last meeting, in March, the Fed still assumed a first rate hike in 2024. On Wednesday, the Fed also hinted for the first time on phasing out the large-scale purchase of government debt, which the central bank has been using to lower long-term interest rates since the start of the corona pandemic. press.

Fed Drivers’ Forecasts

Four times a year, Fed executives and presidents of the Fed’s regional branches are asked their economic forecasts to give. With the US economic recovery gaining momentum and inflation rising faster than expected, most Fed executives expect interest rates to rise faster. Individual estimates by 18 directors show that most of them foresee two rate hikes in 2023. Four of them foresee higher interest rates in 2022.

The Fed’s key interest rate remains historically low for the time being. The ‘target rate’, a bandwidth within which the short-term interest rate must fall, remains between 0 and 0.25 percent. This rate has been in effect since the start of the pandemic in the US in March last year.

“The economic recovery remains incomplete,” Fed president Jerome Powell said at a news conference. But, he added, the Fed’s board will monitor “progress” for the foreseeable future. There had been a “discussion” about phasing out the Fed’s asset-buying program since the start of the pandemic to keep capital market rates low. The Fed buys up about $120 billion in government bonds and state-backed mortgages every month. The Fed is ahead of the European Central Bank, which met last week in the discussion about its buying policy. ECB President Christine Lagarde called it “too early” for a discussion about buying less. The ECB buys a total of about 100 billion euros in government and corporate debt every month. The ECB is not yet ready for an interest rate hike.

The US is ahead of the eurozone in economic recovery, including through an effective vaccination campaign and the hundreds of billions of dollars the administration of President Joe Biden is spending to stimulate the economy.

Inflation in the US has risen sharply, 5 percent year-on-year in May from 1.4 percent in January. The Fed’s inflation target is 2 percent over the longer term. And although current inflation is more than double, the Fed sees insufficient reason to intervene immediately. Inflation, Powell said, is “transient.” Much inflation is caused by acute scarcity of specific products, such as wood and used cars, the Fed chief said. “We expect those very specific things that are driving inflation up to be temporary.” Powell did say that the Fed could be wrong and that inflation could indeed “continue”. In that case, the Fed will “adjust monetary policy.”

The Fed has a dual objective: inflation must average around 2 percent over a longer period of time and there must be “maximum” employment. Because inflation has been below 2 percent for a long time, the Fed wants to see inflation just above 2 percent in the coming years. Maximum employment is not yet within reach. The unemployment rate in the US is now 5.8 percent.

Also read: Can central banks still operate independently of governments?

source https://pledgetimes.com/fed-forecast-higher-interest-rates-from-2023-as-inflation-rises/