Fed Signals an Interest Rate Hike Will Arrive in 2023

17 Jun 2021 · 3rd Party Analysis

Fed Signals an Interest Rate Hike Will Arrive in 2023


In Summary

  • Fed Chair Jay Powell says the central bank expects to raise rates in 2023
  • Fed officials upgraded their inflation outlook to 3.4% in 4Q21, up from 2.4%

Federal Reserve policymakers have agreed to perform the first interest rate change in 2023 since the pandemic began and rates had to be lowered near zero. The period of raising the interest rate is earlier than expected and is prompted by new economic projections that factor in the rapid rise in inflation.

The Federal Reserve Open Market Committee yesterday concluded its two-day policy meeting. Fed officials decided to maintain the current interest rate unchanged at the bottom of 0 to 0.25% for the “foreseeable future”. As it turns out, the consensus has moved forward from the initial projection of raising rates in 2024 to an earlier lift-off in 2023.

The earlier rate hike is indicative of Fed’s belief that the US economy will shift to a full recovery sooner than expected. In turn, the central bank will tighten its monetary policy and allow the economy to cool down. The projections for raising the interest rate currently stand at two rate increases in 2023.

Vaccinations and Effective Policies Create Positive Results

Federal Reserve Chairman Jay Powell appeared yesterday to wrap up the FOMC meeting with a press conference. His speech struck an optimistic tone regarding the outlook for the economy, the speed of new job additions to the labor market, and the overall improvement in the economy fueled by increased vaccinations.

“There’s every reason to think that we’ll be in a labor market with very attractive numbers, with low unemployment, high participation, and rising wages across the spectrum,” Mr. Powell said during the conference on Wednesday. “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,” he added.

The Fed Chair highlighted the risk of sharply higher inflation remains in the economic picture, but he reassured the central bank had the necessary tools to tackle it if needed. Policymakers updated their inflation outlook to 3.4% in the fourth quarter of this year on an annual basis. The projection is up from a March forecast of 2.4%. In the updated projections released yesterday, 13 of 18 Fed policymakers signaled they will support lifting short-term rates by the end of 2023. The median projection showed they expected the benchmark rate to rise to 0.6% from current levels. In March, the committee expected to hold current rates steady throughout 2023.

Fed officials also discussed the topic of reducing bond purchases, so-called tapering. The process of reducing the Fed’s bond purchase program remains “a ways away.” Jay Powell commented that the economy should first make “substantial further progress” for the central bank to consider any adjustment to the current asset purchase scheme of $120bn a month. “You can think about this meeting that we had as the ‘talking about talking about tapering,’ if you like,” Mr. Powell said. When the time comes, the Fed Chair has said, the market would know months in advance so that it could prepare accordingly.

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