Fed hints that interest rate rises will start in 2023
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The Federal Reserve this evening indicated that its first post-pandemic interest rate hikes could come in 2023, sending Wall Street’s markets down.
Although the US central bank kept its current interest rate at the lowest possible levels, the majority of the Fed’s officials predicted at least two 0.25 per cent rate rises in 2023.
That is a year earlier than had previously been forecast, with the bank saying that the economic threat from the pandemic had now “diminished”.
The S&P 500, Dow Jones, and Nasdaq were all down about 1.0 per cent after the predictions were shared, having slid in the run-up to the meeting.
In a statement, the Fed said: “Progress on vaccinations has reduced the spread of COVID-19 in the United States.
“Amid this progress and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement. Inflation has risen, largely reflecting transitory factors.”
For the time being, however, the Fed will continue on its current path, keeping rates on the floor and buying $120bn in bonds each month.
But the new forecasts jar with the central bank’s previous insistence that the current bump in inflation was a temporary blip.
Anna Stupnytska, global economist at Fidelity International, said: “The main news was in the dot plot which showed two rate hikes in 2023, from no hikes in March, which was a hawkish surprise relative to market expectations.
“At the same time, the language on asset purchases was unchanged, with no mention of tapering in the statement, suggesting the bar for an imminent withdrawal policy accommodation remains high, with the current labour market slack clearly weighing on the policymakers’ minds.”