US Fed Keeps Interest Rates Near-Zero Despite Economic Growth, Inflation Expectations

Despite an improving outlook for the US economy, the Federal Reserve reiterated its stance to do absolutely nothing, and instead forecasted tales of impending economic growth, inflation, and significant employment gains.

On Wednesday, the Federal Reserve significantly updated its forecasts for economic growth, but stopped short of indicating an interest rate hike prior to 2023, despite ongoing improvements in the economy and an impending spike in inflation. Moreover, as was widely expected, the FOMC also voted to keep short-term borrowing rates at record-lows, while also continuing at the current asset purchase program rate of $120 billion worth of bonds each month.

According to the FOMC’s updated outlook, GDP is forecast to rise by 6.5% in 2021, before tapering off in the coming years. The median estimate marks an advancement from a previous December expectation of a 4.2% gain. Going forward, the FOMC predicts that GDP will increase by 3.3% and 2.2% in 2022 and 2023, respectively.

Similarly, the FOMC also forecasts a significant improvement in the labour market, with the unemployment rate falling from a current 6.2% to 4.5%. The FOMC’s previous forecast called for an unemployment rate of 5%. Expectations for the subsequent two years call for the unemployment rate to decline to 4.2% next year, and 3.7% in 2023.

Likewise, forecasts for core inflation were updated higher, with the committee now anticipating a 2.2% increase in 2021, followed by a decline to 2% next year, and a slight rise jump to 2.1% in 2023. However, despite the strongly optimistic projections, Federal Reserve Chair Jerome Powell expects the anticipated surge in inflation to only be temporary, and thus does not constitute for a change in policy until full employment is achieved.

However, there was more hawkish sentiment among FOMC members at the latest meeting. Four out of 18 members predicted higher rates by next year, compared to only one vote in December. For 2023, seven officials expected a rate hike, compared with five during the previous meeting.

Inflation fears have been gripping financial markets as of late, causing bond yields to soar to levels not witnessed since the onset of the pandemic. However, the Federal Reserve appears to be content with a slight uptick in bond yields, as long as the increase is reflective of economic growth. Following the FOMC meeting, yields on 10-year treasuries reversed their earlier gains, and US stocks closed higher.

Information for this briefing was found via Bloomberg. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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