Fed sees faster time frame for rate hikes as inflation rises; stocks dip

The Federal Reserve signaled Wednesday that 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-induced recession but have also coincided with rising inflation.

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

But at a news conference after its latest policy meeting, Chair Jerome Powell sought to dispel any concerns that the Fed might be in a hurry to withdraw its economic support by making borrowing more expensive. The economy, Powell said, still hasn’t improved enough for the Fed to reduce the pace of its monthly purchases of Treasury and mortgage bonds.

Those purchases have been intended to hold down long-term loan rates to encourage borrowing.

The Fed has said it will keep buying $120 billion a month in bonds until “substantial further progress” has been made toward its goals of maximum employment and inflation sustainably above 2%.

“We are a ways away from substantial further progress, we think,” Powell said Wednesday.

“But we are making progress.”

For the same reason, the chairman said, it’s too early for Fed officials to discuss when they might raise their benchmark short-term rate from its record low near zero. But he did note that many of the policymakers think the central bank’s goals “will be met somewhat sooner than previously projected.”

In his remarks, Powell drew a mostly positive picture of the economy. The inflation spikes of the past two months, he said, will likely prove temporary, and hiring should accelerate through summer and into the fall as COVID-19 recedes further with increased vaccinations, schools and daycare centers reopen, which will allow more parents to work, and supplemental federal aid for the jobless ends.

“There is every reason,” Powell said, “to think that we will be in a labor market with very attractive numbers, with low unemployment, high participation and rising wages across the spectrum.”

U.S. stocks fell Wednesday after the Federal Reserve’s announcement.

The S&P 500 fell 22.89 points (0.5%) to 4,223.70. The Dow Jones Industrial Average fell 265.66

(0.8%) to 34,033.67. The Nasdaq composite fell 33.17 (0.2%) to 14,039.68 after earlier being down 1.2%. The Russell 2000 index of smaller companies fell 5.38 (0.2%) to 2,314.69.