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 envisions the economy expanding 6.5% this year, up sharply from its previous projection in December of 4.2%. And it raised its forecast for inflation by the end of this year from 1.8% to 2.4%. That level of inflation would finally surpass the Fed’s 2% annual target after years of chronically low inflation. But the Fed foresees inflation falling back to 2% in 2022.
The central bank also said it would continue to buy $120 billion in bonds each month to keep longerterm borrowing costs down.
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 10year Treasury note, which has surged in recent weeks on inflation concerns, declined slightly.
Still, the Fed’s upgraded forecasts will raise 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 more quickly than they did 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 2% and for unemployment to be at 3.5%. Yet it still doesn’t project a rate hike then.
“The state of the economy in two or three years is highly uncertain,” Chair Jerome Powell said at a news conference after the Fed issued its latest policy statement. “I wouldn’t want to focus too much on the exact timing of a potential rate increase that far into the future.”