With inflation rising faster than expected, the Federal reserve thinks an interest rate hike will happen faster than expected. As a result, the agency accelerated its time frame on when to expect it.
Timetable For Interest Rate Hike
Despite the announcement, the central bank has yet to give a specific timetable on when they will stop its bond-buying program.
However, chairman Jerome Powell admitted that the topic came up during the discussions. “You can think of this meeting that we had as the ‘talking about talking about’ meeting,” Powell said.
The phrase is a nod to his statements a year ago when he said that the Fed wasn’t “thinking about thinking about raising rates.”
Currently, the Federal Open Market Committee unanimously decided to retain its near-zero interest for short-term borrowing rates. However, Fed officials indicated that interest rate hikes will happen earlier than anticipated.
Instead of the earlier announced 2024, interest rate hikes can happen as early as 2023. In fact, the dot plot of individual member expectations pointed to two hikes in 2023.
Fed Still Insists That Inflation Is ‘Transitory’
Even as it adjusted its inflation expectation a point higher to 3.4%, officials still insist that inflation remains transitory. This is even after the fact that the US experienced the largest price hike in consumer goods in the last 13 years.
James McCann, the deputy chief economist at Aberdeen Standard Investments, said this isn’t what the market expected. “The Fed is now signaling that rates will need to rise sooner and faster, with their forecast suggesting two hikes in 2023.
This change in stance jars a little with the Fed’s recent claims that the recent spike in inflation is temporary,” he said. Over the long run, the Federal Reserve still thinks inflation rates will hover at their target 2%.
As a result, markets reacted to the Fed’s pronouncements. On a bloody trading day, stocks fell while government bonds posted higher yields. Investors are now bracing for tighter federal policies ahead. This includes easing up on bond purchases beginning this year.
Interest Rates To Go Back To 2%
Kathy Jones, head of fixed income at Charles Schwab, anticipates the needed adjustments. “If you’re going to get two rate hikes in 2023, you have to start tapering fairly soon to reach that goal.
It takes maybe 10 months to a year to taper at a moderate pace. Then you’re looking at we need to start tapering maybe later this year,” she said. In addition, “if the economy continues to run a little bit hot, rate hikes sooner rather than later,” she added.
Meanwhile, Powell expects the inflation rate to sink back to 2% levels. During the post-meeting news conference, he said he expects high inflation readings to abate soon enough.
He also warned about reading too much into the dot-plot assessments. It’s “not a great forecaster of future rate moves. Lift-off is well into the future,” he said.
Coming Too Fast Too Soon
The Federal Reserve chairman also noted that dynamics within the economy’s reopening are shifting fast. It’s “raising the possibility that inflation could turn out to be higher and more persistent than we anticipate.”
The Fed’s dual employment and inflation goals are hitting their 2021 faster than expected. He also noted that the growth rebound is happening so fast that the GDP growth rate might register 7% at the end of this year.
As a result, Fed officials raised GDP expectations for this year to 7% from 6.5% previously. Meanwhile, the unemployment estimate remained unchanged at 4.5%.
US Economy Expanding At A Fast Rate
Recent indicators show that the US economy is expanding at its fastest rate since World War II. However, growth that fast will bring in inflation. Meanwhile, the Federal Reserve continues to prop up its bond-buying activity, which is now at $120 billion 3per months.
Watch the Bloomberg Markets & Finance report that the Federal Reserve signals two rate hikes by end of 2023:
Do you agree that the US will need to hike interest rate hikes a year earlier? What happened to inflation’s transitory nature? Let us know what you think of Biden’s economic policies.
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