Fed may hike rates sooner as inflation rises

Low-interest policies helped fuel recovery, but at cost of high prices

WASHINGTON — The Federal Reserve signaled Wednesday it may act sooner than previously planned to start dialing back the low-interest rate policies that have helped fuel a swift rebound from the pandemic recession, but have also coincided with rising inflation.

The Fed’s policymakers forecast that they would raise their benchmark short-term rate, which influences many consumer and business loans, twice by late 2023. They had previously estimated that no rate hike would occur before 2024.

In a statement after its latest policy meeting, the Fed also said it expects the pandemic to have a diminishing effect on the economy as vaccinations increase, thereby allowing for more growth.

“Progress on vaccinations has reduced the spread of COVID-19 in the United States,” it said. “Amid this progress and strong policy support, indicators of economic activity and employment have strengthened.”

Taken as a whole, the Fed’s latest policy statement reflected its recognition that the economy — and inflation pressures — have gained momentum in the wake of the recession much faster than expected, thanks in part to the pace of vaccinations.

Accordingly, the central bank raised its forecast for inflation to 3.4% by the end of this year, from 2.4% in its previous projection in March. Yet the officials foresee price increases remaining tame in the following two years. That outlook reflects Chair Jerome Powell’s view that the current inflation spikes stem mainly from supply shortages and other temporary effects of the economy’s swift reopening from the pandemic.

Fed officials expect the economy to grow 7% this year, which would be the fastest calendar-year expansion since 1984. It projects, though, that growth will slow after that, to 3.3% in 2022 and 2.4% in 2023.

In addition to having pegged its key rate near zero since March last year, the Fed has been buying $120 billion a month in Treasury and mortgage bonds to try and hold down longer-term rates to encourage borrowing and spending.

The Fed officials are widely believed to have begun discussing a reduction in those monthly bond purchases at the policy meeting that ended Wednesday — a first step in pulling back on its efforts to stimulate the economy. There was no mention of paring those bond purchases in the written statement the Fed issued after the meeting.

The Fed is grappling with a dilemma: Inflation is rising much faster than it had projected earlier this year. And America’s increasingly vaccinated consumers are now comfortable venturing away from home to travel, going to restaurants and movie theaters, and attending sporting events. Solid consumer spending is accelerating economic growth, and manufacturing and housing have strengthened significantly.

However, hiring hasn’t picked up as much as expected.