World news – The Fed expects the key rate to stay close to zero through 2023

The Federal Reserve expects the economy to accelerate rapidly this year, but continues to expect the key rate to stay close to zero through 2023, despite financial markets having concerns about potentially higher inflation.

With its brightening outlook, the Fed significantly improved its forecasts for growth and inflation on Wednesday. It now expects the economy to grow 6.5 percent this year, a sharp increase from December’s previous forecast of 4.2 percent. And the Fed raised its inflation forecast by the end of this year from 1.8 percent to 2.4 percent after years of chronically low inflation.

« The economic situation in two or three years is highly uncertain. »: Jerome Powell, Chairman of the US – Federal Reserve

On Wall Street, investors registered their approval of the Fed’s low interest rate message and sent higher stock indices. And the closely watched yield on the 10-year Treasury note, which has risen in recent weeks on inflation worries, declined slightly.

However, the Fed’s updated forecasts will raise questions about what would ultimately lead them to their near-term Base rate increased, which affects many consumer and business loans. In view of the consolidating economy, political decision-makers assume that the unemployment rate will fall faster than in December: They assume that unemployment will rise from the current 6.2 percent to 4.5 percent by the end of the year and to 3.9 percent in near healthy levels will decline in late 2022.

This suggests that the central bank will be close to its targets by 2023, when it expects inflation to exceed its target of 2 percent and unemployment at 3.5 Percent lies. A rate hike is not yet planned.

« The economic situation in two or three years is highly uncertain, » said Chairman Jerome Powell at a press conference after the Fed issued its latest policy statement. “I don’t want to focus too much on the exact timing of a potential rate hike in the future.” However, there are indications that at least some Fed officials are getting closer to restricting the central bank’s ultra-low interest rate policy. Four of the 18 policymakers now expect a rate hike in 2022, compared to just one in December. And seven predict a hike in 2023, up from five in December. The Fed does not name which officials make which projections.

The decision is made when Powell is faced with a delicate balancing act: the economy is improving significantly. However, if Powell sounds too optimistic, investors might assume that the Fed will reverse its low interest rate prematurely. This could lead to rising bond yields and potentially weaken the economy as borrowing becomes more expensive for businesses and households.

However, if Powell sounds concerned that the labor market is only slowly recovering, it could lead to concerns about the Fed not paying enough attention to inflationary pressures. Again, this perception could cause bond yields to rise as investors anticipate rising inflation. « The economic recovery remains uneven and nowhere near complete, and the way forward remains uncertain, » said Powell on a press conference after the Fed issued its latest policy statement.

Wall Street was higher across the board following the release of the Fed statement and Jerome Powell’s media conference

To complicate the picture, the Fed announced suggested a change in interest rate management policy last year by stating that it plans to keep interest rates near zero « for some time » even after inflation surpassed its target of 2 percent. The change meant that the Fed is willing to tolerate higher inflation than in the past.

Previously, the Fed has often hiked rates only on the prospect of inflation spike, a policy that carries the risk of stall a recovery.

This week’s Fed policy meeting is taking place as the outlook for the economy has improved significantly since it last met in late January. In February, job gains accelerated and retail sales rose after $ 600 relief checks were distributed earlier in the year and President Joe Biden incorporated his economic relief package into law last week. Average daily COVID infections have also fallen sharply, and vaccinations have sped up, raising hopes that after a year of viral reluctance, Americans will increasingly travel, shop, dine and spend freely.

As a result, have economists improved their outlook, and many predict the economy will grow by as much as 7 percent for all of 2021. That would be the fastest annual growth since 1984.

The brighter outlook has seen the yield on 10-year Treasury bills increase as investors dumped bonds, which are usually safe investments during a Downturn acts. The return on 10-year trading was over 1.62 percent on trading Tuesday. At the end of last year it was below 1 percent.

However, the labor market still has a long way to go to fully recover. With an unemployment rate of 6.2 percent, the economy still has 9.5 million fewer jobs than it did a year ago before the pandemic.

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