The Federal Reserve foresees the economy accelerating quickly this year yet still expects to keep its benchmark interest rate pinned near zero through 2023, despite concerns in financial markets about potentially higher inflation.
With its brightening outlook, the Fed on Wednesday significantly upgraded its forecasts for growth and inflation.
It now envisions the economy expanding 6.5% this year, up sharply from its previous projection in December of 4.2%. And the Fed raised its forecast for inflation by the end of this year from 1.8% to 2.4% after years of chronically low inflation.
Still, the Fed’s upgraded forecasts will raise questions about what would cause it eventually to raise its key short-term rate, which affects many consumer and business loans.
As the economy strengthens, the policymakers think the unemployment rate will drop more quickly than they did in December: They foresee unemployment falling from its current 6.2% to 4.5% by year’s end and to 3.9%, near a healthy level, at the end of 2022.
That suggests that the central bank will be close to meeting its goals by 2023, when it expects inflation to exceed its 2% target level and for unemployment to be at 3.5%. Yet it still doesn’t project a rate hike then.
“The economic recovery remains uneven and far from complete, and the path ahead remains uncertain” despite the improved outlook, Powell said at a news conference after the Fed issued its latest policy statement.
There are signs, though, that some Fed officials, at least, are edging closer to reining in the central bank’s ultra-low-rate policies. Four of the 18 policymakers now expect a rate hike in 2022, up from just one in December. And seven predict a hike in 2023, up from five in December. The Fed doesn’t name which officials make which projections.
The decision comes as Powell faces a delicate balancing act: The economy is clearly improving. But if Powell sounds too optimistic, investors might assume the Fed will reverse its low-rate policies prematurely. That could send bond yields rising and potentially weaken the economy as borrowing becomes costlier for companies and households.