Inflation may push Fed to raise rates ahead of schedule
WASHINGTON — 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 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 loans, including mortgages and credit cards — twice by late 2023. They had previously estimated that no rate hike would occur before 2024.
At a news conference, Chair Jerome Powell said the Fed’s policymaking committee also began discussing when to reduce its monthly bond purchases. But Mr. Powell made clear that the Fed has yet to decide when it will do so. The purchases, which consist of $120 billion in Treasury and mortgage bonds, are intended to keep longer-term rates low to encourage borrowing.
The Fed has made clear that its first step in slowing its support for the economy will be to pare its bond purchases — and that it would begin to raise rates only sometime after that. Its key rate has been pinned near zero since March 2020.
The central bank’s new forecast for rate hikes starting in 2023 reflects an economy that’s achieving faster progress than was expected earlier this year.
At the same time, Mr. Powell sought Wednesday to dispel any concerns that the Fed might be in a hurry to withdraw its economic support by making borrowing more expensive. The economy, he said, still hasn’t improved enough to reduce the pace of the monthly bond purchases, which the Fed has said it intends to continue until “substantial further progress” has been made toward its employment and inflation goals.
“We are a ways away from substantial further progress, we think,” Mr. Powell said at his news conference. “But we are making progress.”
Soon after the Fed issued its statement Wednesday, U.S. stocks fell further from their record highs, and bond yields rose. The yield on the 10-year Treasury note rose from 1.48% to 1.55%.
Sung Won Sohn, an economist at Loyola Marymount University in Los Angeles, suggested that the markets’ initially negative reaction to the Fed’s statement might have caused Mr. Powell to take a more dovish tone at his news conference. (“Doves,” in Fed parlance, typically focus on the Fed’s mandate to maximize employment and worry less about inflation. “Hawks” tend to concern themselves more with the need to prevent high inflation.)
“We got two different messages from the Fed today,” Mr. Sohn said. “The interest rate projections were a bit more hawkish than the market expected.”
But at his news conference, Mr. Sohn said, Mr. Powell “emphasized that the economy is still not where it should be, especially in terms of unemployment ... and the Fed still thinks the economy needs stimulus from the central bank.”
Still, Mr. Powell sketched an overall optimistic picture in his remarks Wednesday. 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. That will allow schools and day care centers to reopen, enabling more parents to work, while supplemental federal aid for the jobless ends.
“There is every reason,” Mr. Powell said, “to think that we will [soon] be in a labor market with very attractive numbers, with low unemployment, high participation and rising wages across the spectrum.”
His comments suggested that the Fed chair isn’t concerned that hiring this spring, while solid, has fallen shy of forecasts. Mr. Powell had said in early spring that he would want to see a “string” of hiring reports showing about 1 million added jobs each month. The job market has yet to reach that total in any month this year, though employers have posted a record-high number of open jobs.
At the same time, inflation has shot up much faster than the Fed’s policymakers had forecast in March. Inflation jumped to 5% in May compared with a year earlier — the largest 12-month spike since 2008.
The increase was driven partly by a huge rise in used car prices, which have soared as shortages of semiconductors have slowed vehicle production. Sharply higher prices for car rentals, airline tickets, and hotel rooms were also major factors, reflecting pent-up demand as consumers shift away from the large goods purchases many of them had made while stuck at home to spending on services.