Fed expects growth surge, inflation jump in 2021 but no rate hike

Fed expects growth surge, inflation jump in 2021 but no rate hike

News: Fed expects growth surge, inflation jump in 2021 but no rate hike.

WASHINGTON (Reuters) – The US economy is heading for its strongest growth in nearly 40 years, the Federal Reserve said on Wednesday, and central bank policymakers pledge to keep going despite an expected surge in inflation.

“We have strong data ahead of us,” said a confident Fed chairman Jerome Powell after a two-day political meeting that ticks off the list of forces Fed officials expect to see 6.5 GDP growth this year % will achieve – from massive federal fiscal incentives to optimism about the success of coronavirus vaccines.

“The (stimulus) checks are running out … COVID cases are coming down. Vaccination is progressing rapidly, ”said Powell, marking a moment when a group of US business leaders expect US growth to match China’s this year, not to mention it is rapidly above that of China Europe and Japan goes beyond.

In fact, Fed officials expect economic growth to stay above trend at 3.3% in 2022 and 2.2% in 2023 for at least two years, compared to an estimated long-term potential growth of just 1.8 %.

While inflation is expected to climb to 2.4% this year, above the central bank’s 2% target, Powell says that is seen as a temporary spike that underscores the Fed’s promise to keep interest rates close to zero overnight as part of an effort to keep it going will not change to ensure that the economic wounds of the pandemic are fully healed.

Opinions have shifted somewhat among the 18 current Fed policy makers. Four now expect rates to rise in the next year, and seven see rates hike in 2023.

By ignoring the expected surge in inflation this year without any political reaction, the Fed stuck to its new framework and promised not to overreact at the first hint of rising prices. This reaction has been felt in the past to shorten periods of growth before workers felt the full benefit.

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Fed officials now expect inflation to remain tame as the unemployment rate falls. This is a calculated game based on their new approach, where job growth is paramount and inflation risks are downplayed.

Powell noted that the “strong bulk” of the Federal Open Market Committee, which sets policy, does not expect a rate hike until at least 2024, adding that it is too early to cut the $ 120 billion in government bonds and downsize Mortgage-backed bonds to speak of securities that the Fed buys every month to further prop the economy.

The FOMC’s policy statement to keep the key rate within a target range of 0 to 0.25% overnight was unanimous.

“We are determined to give the economy the support it needs to return to a state of maximum employment as soon as possible,” Powell said in a briefing after the Fed released its new economic forecast and the latest policy statement.

“We are not finished yet. We are clearly on the right track. But we’re not done yet, and I would hate it if we took our eyes off the ball. There are around 10 million people who have to go back to work. “

“Very gloomy”

Markets had eased by the end of Powell’s briefing, and the Fed chief and central bank had avoided potential disruption by signaling that stronger economic forecasts would result in a faster-than-expected move to reduce support for the economy.

US stocks ended the day higher, with the S&P 500 index and Dow Jones Industrial Average closing at record highs. US Treasury bond yields at the longer end of the curve remained elevated while short-term debt yields fell.

“There was just a lot of fear that has definitely driven bond yields so far, but the Fed’s very reluctant response to a fairly strong economic outlook is a big sigh of relief,” said Anthony Denier, chief executive of Webull trading platform.

Compared to the Fed’s initial pandemic forecasts released in June last year, the forecasts released on Wednesday marked a remarkable turnaround after a year of fear of sparking a new global economic crisis and a pandemic that saw more than half a million people died in the United States.

The unemployment rate will fall to 4.5% by the end of this year, compared to the June forecast of 6.4%. It is projected to decline even further over the next year, reaching levels previously thought to be near or below what economists consider full employment. The forecast growth in gross domestic product of 6.5% would be the biggest annual jump since 1984.

After the price hike this year, the Fed expects inflation to decline to 2% by 2022.

“This is mind-boggling given the disruption and economic upheaval over the past year,” wrote Seema Shah, chief strategist at Principal Global Investors.

Reporting by Howard Schneider and Jonnelle Marte; Additional coverage from Shashank S. Nayar in Bangalore; Adaptation by Paul Simao

Original Source © Reuters

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