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Fed policymakers see upward march in interest rates starting next year

Fed policymakers see upward march in interest rates starting next year 1

By Lindsay Dunsmuir

(Reuters) -Half of U.S. Federal Reserve policymakers now expect to start raising interest rates next year and think borrowing costs should increase to at least 1% by the end of 2023, reflecting a growing consensus that gradually tighter policy will be needed to keep inflation in check.

The swifter pace of interest rate hikes compared to the central bank‘s last set of projections in June comes as the economy continues its rapid recovery after a brief recession last year and robust debate at the Fed about balancing its maximum employment and 2% average inflation goals.

It also shows that policymakers continue to see the Delta variant of the coronavirus, which has dented economic activity, as having a short-lived effect on the recovery despite the current turbulence and uncertainty it is causing.

The Fed on Wednesday kept its benchmark overnight lending rate in the current target range of 0% to 0.25%, where it has remained since March 2020 when the economy cratered at the onset of the COVID-19 pandemic, but signaled its bondbuying taper will begin “soon.”

The new economic projections released alongside the policy statement showed nine of 18 Fed policymakers now foresee a liftoff in interest rates next year, compared to seven in June. All but one saw at least one interest rate hike needed by the end of 2023, and nine saw the need to target rates at least as high as between 1% and 1.25% by then.

At a press conference following the meeting, Fed Chair Jerome Powell said the latest set of forecasts showed a growing convergence of views on the rate-setting committee that the economy will continue to strengthen, and pointed to fewer people now seeing rates as needing to stay on hold beyond 2023 as evidence.

“It’s not really an unusually wide array of views about this,” Powell said.

INFLATION SET TO REMAIN HIGHER THAN 2%

By 2024, the Fed’s quarterly so-called “dot plot” showed, the median forecast for interest rates was for 1.8% – still below the 2.5% level the Fed estimates neither stimulates nor restricts economic growth over the long run and therefore broadly accommodative of further job gains.

That’s despite policymakers’ forecast for inflation to remain above the Fed’s 2% target through 2024 as the central bank grapples with price pressures that have remained well above its inflation goal for months and look set to persist into next year amid supply-chain bottlenecks and worker shortages caused by the pandemic.

Powell, who remains of the view that the higher-than-expected inflation is temporary, acknowledged inflation has so far confounded many policymakers’ expectations. This was reflected in a jump in the median forecast on inflation for this year by 0.8 percentage point to 4.2%, although Fed policymakers see it declining to 2.2% in 2022 and 2.1% by 2024.

U.S. gross domestic product at the median is projected to grow 5.9% this year and 3.8% in 2022, compared to forecasts in June of 7.0% in 2021 and 3.3% next year, in line with recent downgrades by private forecasters on account of the impact of the Delta variant of the coronavirus on economic activity.

According to the latest forecasts, Fed policymakers now also see the unemployment rate falling to 4.8% this year, compared with 4.5% in the June forecast, and 3.8% in 2022, which would be a level many at the Fed see as meeting the progress test set for a rate liftoff.

“If you look at what people are writing down for year-end 2022 numbers, some people are writing down very low unemployment rates and that’s only one indicator but it suggests a very strong labor market and I think they are writing down in good faith what they see as meeting the test,” Powell said.

(Reporting by Lindsay Dunsmuir and Ann Saphir; Editing by Paul Simao and Andrea Ricci)

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