The Federal Reserve held rates near zero on Wednesday but hinted that rate hikes might come earlier than expected and lowered its economic outlook for this year significantly.
Along with these widely anticipated moves, officials on the Federal Open Market Committee announced that they would begin withdrawing some of the incentives the central bank provided during the financial crisis. However, there was no specific indication of when this might happen.
“If progress continues broadly as expected, the committee believes that moderation in asset purchases may soon be warranted,” the FOMC said after the meeting. Respondents to a recent CNBC poll said they expect the bond buying reduction to be announced in November and started in December.
Fed chief Jerome Powell said at his post-meeting press conference that the committee was ready to move.
“While no decisions were made, participants generally felt that a gradual wind-down process, which will be completed around the middle of next year, is likely to be appropriate as long as the recovery remains on track,” he said.
For the time being, the committee unanimously voted to anchor short-term interest rates close to zero.
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However, more members are now seeing the first rate hike in 2022. In June, when members last published their economic forecasts, a narrow majority said the rate would increase in 2023.
Powell said the Fed was getting closer to its “significant further progress” targets for inflation and employment.
“On inflation, we seem to have made more than significant progress, substantial progress. That part of the test has been achieved in my opinion and so has many,” he said.
“My own view is that the test of substantial further employment advancement is virtually passed,” added Powell.
Markets initially gave up some of their gains following the Fed news, with major stocks averages still showing strong gains and government bond yields mixed.
There have been some major changes to the Fed’s economic outlook, with a decline in growth prospects and higher inflation expectations.
The committee now expects GDP growth of just 5.9% this year, compared to a forecast of 7% in June. However, growth in 2022 is now set at 3.8%, down from 3.3% previously and 2.5% in 2023, an increase of a tenth of a percentage point.
The forecasts also signaled that FOMC members see inflation stronger than forecasted in June. Core inflation is projected to rise 3.7% this year, compared to the 3% forecast when members last voiced their expectations. Officials then see inflation at 2.3% in 2022, compared to the previous forecast of 2.1% and 2.2% in 2023, a tenth of a percentage point higher than the June forecast.
Including food and energy, officials expect inflation to reach 4.2% this year, up from 3.4% in June. A decline to 2.2% is expected for the next two years, little changed compared to the June outlook.
In a further step, the Fed announced that it would double the repurchase of its daily market operations from 80 billion US dollars to 160 billion US dollars.
Markets had hardly expected any major decisions from the meeting, but were at times nervous when the Fed began to slow the pace of its monthly bond purchases.
Powell said during the Fed’s annual symposium in Jackson Hole, Wyoming in August that he and others believed the central bank had reached its inflation target and could begin raising monthly minimums of $ 120 billion on government bonds and purchases reduce mortgage-backed securities.
Investors also watched the session to see what Fed officials think about the inflation outlook.
The Fed’s preferred measure of inflation – the index of consumer spending minus food and energy prices – accelerated 3.6% in July, its highest level in 30 years. However, Powell has repeatedly said that he expects price pressures to ease as supply chain factors, goods shortages and unusually high demand return to pre-pandemic levels.
Unemployment forecasts were a little more pessimistic, with the year-end unemployment rate now at 4.8%, down from 5.2% today and the June estimate of 4.5%. This follows a disappointing August payroll report that showed employment growth of just 235,000.
However, Powell said it wouldn’t take blockbuster job numbers to get the Fed to start lifting policy adjustments.
“For me it wouldn’t need a knockout, a great, super strong employment report. It would take a reasonably good employment report to feel like this test passed. Others on the committee, many on the committee, think that the test is already familiar. Others want to see more progress, “he said.
Correction: An equal number of FOMC members see a rate hike in 2022 as those who don’t, although the central bias is listed as an increase in the Fed’s summary of economic forecasts next year. An earlier version misrepresented the individual expectations of committee members. In addition, the GDP estimates for 2023 were given an incorrect number.
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