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WASHINGTON – Federal Reserve officials may indicate this week that they expect to raise interest rates sooner than previously expected after a series of higher inflation readings.
In March, the last time they released quarterly economic forecasts, most officials expected the Fed’s benchmark interest rate to be kept near zero through 2023 to encourage the economy’s recovery from the pandemic. Officials are due to release their updated forecast Wednesday after a two-day political meeting.
Federal Reserve officials in March saw consumer prices rise 2.4% in the fourth quarter of 2021 from a year earlier. That pace, they said, would be consistent with their target of 2% average annual inflation over the long term.
Inflation has since risen, the economy has rebounded much faster than expected, companies have struggled hiring workers, and shortages of key materials have wreaked havoc on supply chains.
The Labor Department’s consumer price index jumped 5% in May from a year earlier, after a 4.2% increase in the 12 months through April.
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For inflation to meet officials’ expectations for March, prices will have to not only stop rising, but fall over the rest of the year. Barclays Bank PLC now expects annual inflation, measured by the Federal Reserve’s preferred metric, to reach 3.6% in the fourth quarter — nearly double the central bank’s target.
Fed officials’ individual forecasts for March, outlined in the so-called dot plot, showed that all 18 policymakers expect to leave interest rates unchanged this year. Four are expected to start raising rates next year, and seven expect rates to be higher by the end of 2023.
Analysts say the new dot chart coming Wednesday could show more individuals expect interest rates to rise in 2022 or 2023. A June survey of 127 market participants by MacroPolicy Perspectives LLC showed that 68% of respondents expect at least one rate hike. On average in 2023.
Michael Feruli, chief US economist at JPMorgan Chase, said he now expects the point plot to show a moderate expectation of a rate increase in 2023.
“We are also providing our take-off projections to late 2023,” he said in a note on Friday.
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Signs of inflation rising faster than the Fed expected at its April policy meeting. Fed officials have not publicly commented on the May inflation report because it was released Thursday during their self-imposed blackout, when they refrain from speaking publicly about monetary policy before their meeting.
Before the blackout period began on June 5, officials repeatedly said they expected the rise in inflation this year to be temporary, but they also warned that they would raise rates if necessary to control inflation.
“If inflation moves materially and persists above 2 percent, we have the tools and experience to gently guide inflation back to the target level. No one should doubt our commitment to do so,” Fed Governor Lyle Brainard said in a June 1 speech. .
The Fed in August adopted a new approach to setting interest rates by abandoning its longstanding practice of proactively raising them to prevent inflation from exceeding its 2% target. Instead, you want the inflation rate to reach 2% over time, which is a more flexible target. Since August, the Fed has said it will aim for inflation to rise moderately above that level for a period of time to make up for many years of shortfall.
Policy makers have said since December that they will not raise rates until inflation reaches 2% and is expected to exceed that level for some time and the economy will maximize employment.
This year’s job market progress has been slower than officials had hoped. In recent weeks, some Federal Reserve officials have indicated that they may reduce the number of job gains required to reach maximum employment opportunities, due to the retirement wave since the pandemic began.
Federal Reserve officials at their meeting this week are also likely to begin discussing when and how to begin reducing the central bank’s monthly purchases of Treasuries and mortgages. When they discontinued previous bond-buying programmes, they allowed the so-called tapering process to run its course before interest rates were raised. Many economists expect the tapering to start at the end of this year or early 2022.
In a statement after the April policy meeting, Fed officials said the economy needed to make “more significant progress” toward maximum employment and sustainable inflation of 2% before they could begin to cut back on bond purchases.
Fed officials’ updated forecasts are also likely to show that they expect the economy to grow faster this year than the 6.5% they forecast in March. Economists at Goldman Sachs & Co LLC are estimating growth of 7.7% this year, which helped drive inflation to 3.5% in the last quarter of the previous year.
Write to Paul Kiernan at [email protected]
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