Fed expected to hold rates steady as recovery and inflation accelerate
The Federal Reserve is expected to keep its main interest rate on hold at the rock-bottom range of 0 to 0.25 per cent where it has stood since the start of the pandemic, as the US recovery gains speed and inflation rises.
But at the conclusion of its two-day policy meeting on Wednesday, the central bank will also set out new economic projections, with investors focusing on whether most officials now forecast the first interest rate increase in 2023, as opposed to 2024 at the earliest.
The Fed is also expected to keep its asset purchases steady at $120bn per month — another feature of the exceptionally loose monetary policy introduced to fight the economic fallout from the pandemic — but officials are expected to debate the timing and conditions of an eventual move to start reducing those bond buys.
That process, known as “tapering”, could be discussed for months before a move is made. The Fed has said the economy would have to make “substantial further progress” compared to last December in order for to start slowing its support for the economy.
While inflation has been moving above the Fed’s target of 2 per cent on average, its full employment goal has not been met. Some 7.6m fewer Americans hold jobs than in February 2020.
The Fed’s last set of economic projections in March had the median Federal Open Market Committee participant forecasting gross domestic product growth of 6.5 per cent this year, with the unemployment rate dropping to 4.5 per cent. Core inflation was expected to be 2.2 per cent this year and fall back to 2 per cent in 2022.
Since the last meeting of the FOMC in April, US equity markets have rallied, while 10-year Treasury yields have dropped, as investors bet the Fed will keep its monetary stimulus going and this year’s inflationary pressures will be transitory.
The Fed’s decision is due at 2pm Eastern time, with a press conference from Jay Powell, the central bank’s chair, to follow.