US Fed signals two rate hikes by end-2023 as economy rebounds

Pedestrians along Rodeo Drive in Beverly Hills, California, on Tuesday, when the state lifted most of its Covid-19 restrictions as part of a grand reopening. Senior US economist Thomas Costerg at Pictet Wealth Management said of the Federal Reserve's
Pedestrians along Rodeo Drive in Beverly Hills, California, on Tuesday, when the state lifted most of its Covid-19 restrictions as part of a grand reopening. Senior US economist Thomas Costerg at Pictet Wealth Management said of the Federal Reserve's rate projections: "We are looking at a Fed that seems positively surprised by the speed of vaccinations and the ongoing withdrawal of social distancing measures." PHOTO: BLOOMBERG

Federal Reserve officials signalled that the pace of the United States' economic recovery from the pandemic is bringing forward their expectations for how quickly they will reduce policy support.

Chairman Jerome Powell told a press conference on Wednesday that officials have begun a discussion about scaling back bond purchases, after releasing forecasts that show they anticipate two interest rate increases by the end of 2023, projecting a faster-than-anticipated pace of tightening.

"The economy has clearly made progress," Mr Powell said, noting that policymakers had debated how far the economy has travelled towards their threshold for scaling back US$120 billion (S$160 billion) in monthly bond purchases.

He was speaking after a two-day gathering of the Federal Open Market Committee (FOMC).

The central bank held the target range for its benchmark policy rate unchanged at zero to 0.25 per cent - where it has been since March last year. The FOMC vote was unanimous.

The dollar rose, stocks declined and yields on 10-year Treasuries jumped following the news.

"It's a hawkish surprise," said Mr Thomas Costerg, a senior US economist at Pictet Wealth Management, referring to the rate projections.

"We are looking at a Fed that seems positively surprised by the speed of vaccinations and the ongoing withdrawal of social distancing measures."

The quarterly projections showed 13 out of 18 officials favoured at least one rate increase by the end of 2023, versus seven in March. Eleven officials saw at least two hikes by the end of that year. In addition, seven of them saw a move as early as next year, up from four.

Mr Powell cautioned that discussions about raising rates would be "highly premature".

The Fed marked up its inflation forecasts through the end of 2023.

Officials see their preferred measure of price pressures rising 3.4 per cent this year, compared with a March projection of 2.4 per cent.

The 2022 forecast rose to 2.1 per cent from 2 per cent, and the 2023 estimate was raised to 2.2 per cent from 2.1 per cent.

Consumer price pressures have proven hotter than expected over the last two months. Labour Department figures showed a 0.8 per cent jump in prices in April and a 0.6 per cent rise last month, marking the two biggest monthly increases since 2009.

"As the reopening continues, shifts in demand can be large and rapid, and bottlenecks, hiring difficulties and other constraints could continue to limit how quickly supply can adjust - raising the possibility that inflation could turn out to be higher and more persistent than we expect," Mr Powell said.

Labour Department reports on employment published since the last gathering of the FOMC in late April, on the other hand, have disappointed, relative to forecasters' expectations. The US unemployment rate was still elevated at 5.8 per cent last month, with total employment still at millions of jobs below pre-pandemic levels.

Still, the FOMC median projection for unemployment in the fourth quarter of this year was unchanged at 4.5 per cent, and the median estimate for the same quarter a year later was marked down to 3.8 per cent from 3.9 per cent. The 2023 forecast was held at 3.5 per cent.

The FOMC has raised its projections for economic growth. Gross domestic product was seen expanding 7 per cent this year, up from a prior projection of 6.5 per cent. It maintained the 2022 expansion forecast at 3.3 per cent, and raised the 2023 estimate to 2.4 per cent from March's 2.2 per cent.

BLOOMBERG

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A version of this article appeared in the print edition of The Straits Times on June 18, 2021, with the headline US Fed signals two rate hikes by end-2023 as economy rebounds. Subscribe