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Federal Reserve officials expect to begin raising interest rates in 2023, earlier than previously anticipated, according to new economic projections that predicted faster growth and sharply higher inflation this year.
At the end of Wednesday’s two-day policy meeting, the US central bank held its main interest rate in the lower range of 0 to 0.25%, where it has been since the beginning of the pandemic.
But while in March, when most Fed officials predicted that current rates would be maintained until at least 2024, the consensus has shifted to a previous withdrawal in 2023, indicating the central bank’s belief in a faster transition to a full recovery and a narrower monetary reduction. politics.
The Fed’s new set of economic projections now has the average participant in the Federal Open Market Committee forecasting 7% gross domestic product growth this year, compared to 6.5% in March, with a rate of unemployment fell to 4.5%, in line with previous predictions. Core inflation is expected to be 3% this year, well above the 2.2% forecast in March, before falling back to 2.1% in 2022.
“Progress in vaccinations has reduced the spread of Covid-19 in the United States,” the FOMC said. “In the midst of this progress and strong political support, the indicators of economic activity and employment have been strengthened. The sectors most affected by the pandemic remain weak, but have improved. ”
The FOMC held its Wednesday asset purchase is constant at $ 120 billion a month – another feature of the exceptionally weak monetary policy introduced to combat the economic consequences of the pandemic. Officials are expected to hold initial talks on the timing and conditions of a possible move to begin reducing those bond purchases, but the statement made no mention of any changes.
The process of reducing the Fed’s debt purchases, known as “reduced,” could be discussed for months before a measure is made. The Fed has said the economy should make “substantial progress” compared to last December to begin reducing its extraordinary support for the economy.
While inflation has been moving above with the Fed targeting 2% on average, its full employment target has not been met. About 7.6 million fewer Americans occupy jobs than in February 2020.
The Fed has stressed that its monetary policy stance is not based on timing, but depends on economic outcomes. Specifically, he said it would only raise interest rates if the economy is in full employment, with inflation at 2% and on track to surpass that level for some time. Still, while seven out of 18 FOMC members predicted a first rate hike in 2023 in March, 13 did so on Wednesday.
Since the last FOMC meeting in April, U.S. equity markets have intensified, while borrowing costs have fallen from recent highs as investors bet the Fed will keep its monetary stimulus and this year inflationary pressures it will be transient.
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