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At their mid-June policy meeting, officials of the U.S. Federal Reserve indicated that they are considering raising their benchmark interest rate from its current 0.25 percent, set in March 2020, to as much as 0.6 percent some time in 2023.
Thirteen of eighteen officials present at the meeting signaled they expected to vote to raise the rate some time in 2023; at March’s meeting, a majority expected the rate hike would not be needed until some time in 2024.
Seven officials at the meeting expect to raise rates next year, up from four who held the view in March.
In the meeting, officials also discussed the prospect of forming a plan to taper the Fed’s $120-billion-a-month bond-buying program that began in June 2020. The officials put no timetable on any such move.
The Dow Jones Industrial Average dipped more than 300 points on the news; the yield on 10-year treasury bonds jumped temporarily from about 1.49 percent to 1.56.
“Progress on vaccinations has reduced the spread of COVID-19 in the U.S.,” Fed chair Jerome Powell said after the meeting in a press conference reported by the Wall Street Journal.
“Amid this progress and strong policy support, indicators of economic activity and employment have strengthened,” he said.
The Fed also raised its outlook for U.S. GDP growth this year from 6.5 percent to 7.
Still, the Fed wants to see “substantial further progress” in the economy’s recovery dating from December 2020, which includes full employment and sustained inflation above 2 percent before cutting back on bond purchases or raising interest rates.
Although the economy added 837,000 jobs in April and May, 7.6 million more people remain out of work than before 2020’s economic crash. The labor market remains uncertain.
The Fed’s outlook for unemployment this year was unchanged at the meeting and remains at 4.5 percent.
In contrast to an uncertain jobs market, inflation galloped at 5 percent in May, its fastest pace since September 2008.
The U.S. commerce department’s personal consumption expenditure price index is now predicted to rise 3.4 percent in this year’s fourth quarter compared to 2020’s final three months, a full point higher than the 2.4-percent prediction made in March.
The index is the Fed’s preferred inflation gauge, the WSJ noted.
The Fed expects that rate to recede to 2.1 percent next year, CNBC reported.
The time for tapering bond purchases remains “a ways away,” Powell said, and the central bank will be reviewing possible timetables at future meetings for reducing its bond-buying.
The central bank’s process for determining when to raise rates or ease back on bond purchases “will be orderly, methodical, and transparent,” Powell said.
“We see real value in communicating well in advance what our thinking is and we’ll try to be clear,” he added.
Powell’s comments and the Fed’s change in tone are “a wake-up call to the market,” strategist Phil Orlando at asset manager Federated Hermes told the WSJ.
TRENDPOST: Buried in the minutes of the Fed’s meeting is a telltale sign that officials are losing confidence that inflation is temporary. Indeed, we have been detailing their flip-flops on where inflation is heading in last week’s Trends Journal.
In March’s meeting, only five of eighteen officials present thought inflation’s risk was “weighted to the upside.” In this month’s meeting, thirteen officials thought it was.
Translated from Fed-speak, a majority of the 18 now believe that inflation will be stronger and last longer than the central bank previously expected.
TREND FORECAST: The Fed is letting markets know, little by little, that rate hikes are coming, bond purchases will be ending, and the days of cheap money are numbered. The market’s reaction to this first hint indicates that breaking the news must be a gradual and delicate process if markets are to maintain a degree of equilibrium.
With a global commodities supercycle, product shortages, and other factors in place pushing inflation upward, we hold to our forecast that the Fed will be forced to raise interest rates not only sooner than 2023, but possibly as early as later this year.
Investors will continue to hedge against the correction that will come when the era of cheap money ends.