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World Federal Reserve raises inflation expectations, mulls 2023 liftoff

01:45  17 june  2021
01:45  17 june  2021 Source:   aljazeera.com

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The Federal Reserve said Wednesday that it would maintain ultra-low interest rates and reaffirmed its commitment to other easing policies, but projected a rate hike in 2023 amid signs of a rapidly strengthening economic recovery. The U.S. central bank, as widely expected , held the benchmark The Fed also released updated economic projections that show officials expect rates to raise beginning in 2023 . Policymakers met against the backdrop of deeply conflicting economic data: Although consumer prices are rapidly rising – surging 5% in May from a year prior, the fastest year-over-year

The Federal Reserve said it would keep interest rates steady near 0% and keep buying 0 billion of bonds a month, maintaining a historically loose monetary policy even as officials increased their estimates of coming inflation . Fed officials see inflation rising more rapidly than they did in March, but their median expectation is still for interest rates to stay close to zero at least through 2023 , based on the “Summary of Economic Projections” (SEP) released Wednesday. “ Inflation has risen, largely reflecting transitory factors,” Fed officials said in a statement released at the conclusion of their

The United States Federal Reserve reiterated Wednesday that it is willing to tolerate a higher level of inflation as it works towards its goal of getting as many Americans back to work as possible, but upped its comfort level when it comes to how high it is willing to see that rate go.

Jerome Powell wearing a suit and tie: In remarks following a policy meeting, United States Federal Reserve Chairman Jerome Powell urged patience and humility as the US rebuilds its economy after the unprecedented coronavirus pandemic [File: Susan Walsh/AP Photo] © Provided by Al Jazeera In remarks following a policy meeting, United States Federal Reserve Chairman Jerome Powell urged patience and humility as the US rebuilds its economy after the unprecedented coronavirus pandemic [File: Susan Walsh/AP Photo]

In remarks following the conclusion of the Fed’s latest two-day policy meeting, Chairman Jerome Powell urged patience and humility as the US economy continues to recover from last year’s COVID-19 lockdowns.

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Source: Federal Reserve . The median member of the FOMC in the so-called “dot plot,” which maps out each member’s expectations for rates over coming years, now expects two rate hikes by the end of 2023 . For comparison, the Fed’s dot plots in March of this year showed the median member expecting no rate hikes through that time horizon. But chatter is building within the central bank over kicking off discussions about when to begin slowing the pace of those purchases. Those eager to begin the “taper talks” have also expressed concern over the risk of rising inflation .

The Federal Reserve 's revised median expectation was a significant/slight increase from the 2.2% officials were predicting in March. The Federal Reserve said it would keep interest rates steady near 0% and keep buying 0 billion of bonds a month, maintaining a historically loose monetary policy even as officials increased their estimates of coming inflation . Fed officials see inflation rising more rapidly than they did in March, but their median expectation is still for interest rates to stay close to zero at least through 2023 , based on the “Summary of Economic Projections” (SEP) released Wednesday.

“This is an extraordinarily unusual time and we really don’t have a template or any experience of a situation like this, and so I think we have to be humble about our ability to understand the data,” Powell said. “It’s not a time to try to reach hard conclusions about the labour market, about inflation, about the path of policy. We need to see more data and we need to be a little bit patient.”

The Fed — which is the US’s central bank — wrapped up its fourth meeting of 2021 with an announcement that policy would be left largely unchanged, with interest rates remaining near zero and the Fed’s bond-buying continuing at $120bn per month. The vote to keep interest rates steady was unanimous among the 18 members of the Federal Open Market Committee.

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Federal Reserve Chairman Jerome Powell said in a press conference Wednesday they now expect to hike the interest rate from near zero to 0.6 percent by the end of 2023 . Back in March, the central bank said it didn't expect to raise it until at least 2024. The interest rate affects both consumer and business loans, impacting everything from credit cards to mortgages. Inflation in the US rose at a faster rate in May than any time since the Great Recession, data last week showed. The updated interest rate projection comes as the Federal Reserve attempts to put a brake on such out-of-control prices.

Members of the Federal Reserve now see two interest rate hikes in 2023 , according to the central bank's so-called dot-plot projections. Wednesday's forecast showed 13 members believe the Fed will hike rates in 2023 and the majority of them believe the central bank will hike at least twice that year. Previously expected in March, four of the 18 Federal Open Market Committee members were looking for a rate hike at some point in 2022. At the same time, seven members saw a rate increase in 2023 .

The meeting’s big surprise came courtesy of policymakers’ latest economic projections, which see the Fed’s preferred measure of inflation — personal consumption expenditures (PCE) — rising to 3.4 percent this year, a full percentage point higher than its March forecast of 2.4 percent.

The latest Fed projections see inflation dropping to 2.1 percent next year, as opposed to its March call of 2 percent. It also moved forward its projected timeline on raising interest rates to as soon as 2023. In March, policymakers targeted 2024 as the earliest time for a rate liftoff.

The inflation question

In its post-meeting statement, the Fed maintained that the recent rise in inflation is “largely reflecting transitory factors” such as the economy gearing back up again from its pandemic hibernation — a position Powell echoed in his statements following the meeting.

“Inflation has come in above expectations over the last few months,” said the Fed chief. “But if you look behind the headline numbers, you’ll see that the incoming data are consistent with the view that the prices that are driving that higher inflation are from categories that are being directly affected by the recovery from the pandemic and the reopening of the economy.”

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In conjunction with the Federal Open Market Committee (FOMC) meeting held on June 15-16, 2021, meeting participants submitted their projections of the most likely outcomes for real gross domestic product (GDP) growth, the unemployment rate, and inflation for each year from 2021 to 2023 and over the longer "Appropriate monetary policy" is defined as the future path of policy that each participant deems most likely to foster outcomes for economic activity and inflation that best satisfy his or her individual interpretation of the statutory mandate to promote maximum employment and price stability.

Federal Reserve officials this week could project interest-rate liftoff in 2023 amid faster economic growth and inflation , but they won’t signal scaling back bond purchases until August or September, according to economists surveyed by Bloomberg. More than half predict the quarterly rate-forecast The Federal Open Market Committee is expected to reaffirm plans to only adjust purchases once the U.S. economy achieves “substantial further progress” toward its employment and inflation goals in its policy statement released at 2 p.m. Washington time on Wednesday. Nor is the Fed expected to

As an example, Powell cited lumber prices, which have climbed recently, stymieing homebuilders’ ability to capitalise on an increase in demand for new homes by Americans seeking more space after a year at home. But Powell said that because those price hikes are the result of shortages and bottlenecks, they should begin to drop eventually.

Progress and risks

In a press release, the Fed hailed “progress” as a widespread vaccination campaign has helped curb COVID-19 infections and deaths in the US, which, along with “strong policy support”, has allowed economic activity and employment to strengthen.

The Fed’s June projections painted a rosier picture for both growth and employment, upping the March projection for 2021 gross domestic product growth by half a percentage point to 7 percent. It also sees the unemployment rate falling to 4.5 percent this year and 3.8 percent next year before returning to the pre-pandemic level of 3.5 percent in 2023.

While sectors such as the hospitality industry that were hardest hit by restrictions aimed at curbing the spread of COVID-19 remain weak, they have also “shown improvement”, the Fed said.

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But Powell warned the country wasn’t totally “out of the woods” yet. Concerns about vaccine hesitancy among Americans and fast-spreading strains of COVID-19 including the Delta variant remain.

“The path of the economy will depend significantly on the course of the virus. Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain,” said the Fed’s statement.

To mitigate those risks, the Fed said it is willing to tolerate inflation moderately above its 2 percent target rate “for some time” in order to keep the long-term outlook anchored at 2 percent.

Rising prices

Inflation has become a buzzword in the world’s largest economy as American consumers’ pent-up demand to spend after a year at home runs up against supply chain headaches, a scramble for raw materials and rising producer prices.

As the Fed leaders sat down for the first day of their meeting Tuesday, fresh data released this week showed that producer prices continue to climb as countries that are reopening battle supply-chain bottlenecks and contend with higher costs of raw materials for factories.

Food and energy prices led the advance higher in the US government’s Producer Price Index, with food prices jumping 2.6 percent last month and energy prices climbing 2.2 percent after contracting in April.

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Higher producer prices translate into higher costs for wholesalers, who saw prices rise a record 0.8 percent in May on a monthly basis and a blistering 6.6 percent over the past 12 months – the biggest jump on record, according to data from the US Bureau of Labor Statistics (BLS).

Those snowballing costs then translate into higher prices for consumers, which hit people with lower incomes particularly hard because their wages don’t stretch as far as they used to and they have less disposable income to start.

The data shows that’s already happening: US consumer prices rose a brisker-than-expected 0.6 percent in May, another uptick after April’s 0.8 percent rise. Because consumer spending is responsible for two-thirds of the US’s economic growth, pain in the pocketbook has broader consequences.

The fear is that if price increases get out of control, the Fed will be forced to raise interest rates, which makes borrowing money more expensive and curbs economic growth.

But Powell reassured Americans on Wednesday that the Fed is sticking to its plan of keeping rates near zero until the labour market fully recovers.

Getting the US back to work

Americans are still spending, albeit on different things. Retail sales in May fell a bigger-than-expected 1.3 percent from a month earlier, the United States Department of Commerce said on Tuesday, as consumers spent less at car dealerships and at furniture, electronic and home improvement stores.

Instead, the advent of summer seems to be motivating Americans to spend more on personal care products and food and beverages as many parts of the country further lift restrictions on gyms, restaurants, bars and hotels.

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But the battered hospitality sector continues to have a hard time attracting workers. Eating and drinking establishments added a net 186,000 jobs in May, the fifth straight month of gains, according to BLS data. But staffing levels in May remained 12 percent below pre-pandemic levels, the National Restaurant Association found.

The staffing shortage is being driven by a number of factors, experts say, from bottlenecks and workers who can’t find childcare to people switching careers.

Some are also blaming the $300 federal top-up to state unemployment benefits, which they argue acts as a disincentive for people to go out and find jobs. Twenty-five states have announced plans to withdraw from the federal unemployment benefits programme, which includes the $300 weekly top-up. All of those states are led by Republican governors.

Yet Powell predicted a stronger labour market than ever before if the US can stay the course in the recovery, and he signalled that as children return to school, vaccination rates continue to increase and some federal unemployment benefits expire, many more Americans will return to work in the short term.

In the long term, Powell painted an even more positive picture.

“I think it’s clear and I am confident that we are on a path to a very strong labour market — a labour market that shows low unemployment, high participation and rising wages for people across the spectrum,” Powell said. “That’s shown in our projections. It’s shown in outside projections. And if you look through the current timeframe and think one and two years out, we’re going to be looking at a very, very strong labour market.”

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