Fed expects to keep its key rate near zero through 2023
The Federal Reserve foresees the economy accelerating quickly this year yet still expects to keep its benchmark interest rate pinned near zero through 2023, despite concerns in financial markets about potentially higher inflation.
With its brightening outlook, the Fed on Wednesday significantly upgraded its forecasts for growth and inflation. It now expects the economy to expand 6.5% this year, up sharply from its previous projection in December of 4.2%. And the Fed raised its forecast for inflation by the end of this year from 1.8% to 2.4% after years of chronically low price increases.
The Fed also said it would continue its monthly purchases of $120 billion in bonds, which are intended to keep longer-term borrowing costs low.
On Wall Street, investors registered their approval of the Fed’s low-rate message, sending stock indexes higher. And the closely watched yield on the 10-year Treasury note, which has surged in recent weeks on inflation concerns, declined slightly.
Still, the Fed’s upgraded forecasts raised questions about what would cause it eventually to raise its key short-term rate, which affects many consumer and business loans. As the economy strengthens, the policymakers think the unemployment rate will drop faster than they thought in December: They foresee unemployment falling from its current 6.2% to 4.5% by year’s end and to 3.9%, near a healthy level, at the end of 2022.
That suggests that the central bank will be close to meeting its goals by 2023, when it expects inflation to exceed its 2% target level and for unemployment to be at 3.5%, which is where it was before the pandemic struck. Yet it still doesn’t project a rate hike then.
At a news conference after the Fed’s latest policy meeting, Chair Jerome Powell stressed that the central bank wants to see substantial improvement in the job market and economy and won’t reverse its low-rate policies based solely on forecasts. Last year, the Fed altered its policy framework to make clear that it would eventually raise rates only after annual inflation had exceeded its 2% target “for some time” — and not just when higher inflation appeared likely.
On Wednesday, Powell appeared intent on emphasizing that shift.
“We’re going to wait to see actual data,” he said. “And I think it will take people time to adjust to that new practice. And the only way we can really build the credibility of that is by doing it.”
Brian Bethune, an economics professor at Tufts University, said: “The message here is that the Fed is not concerned about inflation right now. The trend around the world is toward lower inflation. Since that is the case, the Fed is saying, why worry about it? This low inflation trend is the Fed’s friend.”