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

EconomyMar 17, 2021 07:10PM ET
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2/2 © Reuters. FILE PHOTO: The Federal Reserve building is pictured in Washington, DC 2/2

By Howard Schneider and Ann Saphir

WASHINGTON (Reuters) - The U.S. economy is heading for its strongest growth in nearly 40 years, the Federal Reserve said on Wednesday, and central bank policymakers are pledging to keep their foot on the gas despite an expected surge of inflation.

"Strong data are ahead of us," a confident Fed Chair Jerome Powell said after a two-day policy meeting, ticking off the list of forces Fed officials expect will produce 6.5% GDP growth this year - from massive federal fiscal stimulus to optimism around the success of coronavirus vaccines.

"The (stimulus) checks are going out ... COVID cases are coming down. Vaccination is moving quickly," Powell said, marking a moment in which a body of top U.S. economic officials expect growth in the United States to rival that of China this year, not to mention surging quickly beyond that of Europe and Japan.

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

While inflation is expected to jump to 2.4% this year, above the central bank's 2% target, Powell said that is viewed as a temporary surge that will not change the Fed's pledge to keep its benchmark overnight interest rate near zero as part of an effort to ensure the economic wounds from the pandemic are fully healed.

Opinions among the Fed's 18 current policymakers did shift somewhat, with four now expecting rates may need to rise next year and seven seeing a rate increase in 2023.

But in overlooking the expected jump in inflation this year without a policy response, the Fed held true to its new framework and a pledge not to overreact at the first hint of rising prices, a reaction that has in the past been felt to nip off periods of growth before workers felt the full benefits.

Fed officials now expect inflation to remain tame even as the unemployment rate drops, a calculated gamble under their new approach that emphasizes employment gains and downplays inflation risks.

Powell noted the "strong bulk" of the policy-setting Federal Open Market Committee anticipates no interest rate increase until at least 2024, and he added that it was even too soon to talk about scaling back the $120 billion of Treasury bonds and mortgage-backed securities the Fed is buying each month to further prop up the economy.

The FOMC's policy statement, which kept the benchmark overnight interest rate in a target range of 0-0.25%, was unanimous.

"We are committed to giving the economy the support it needs to return as quickly as possible to a state of maximum employment," Powell said in a briefing after the Fed released its new economic projections and latest policy statement.

"We are not actually done yet. We are clearly on a good path. But we are not done, and I would hate to see us take our eye off the ball ... There are in the range of 10 million people who need to get back to work."

'VERY DOVISH'

Markets had relaxed by the end of Powell's briefing, with the Fed chief and the central bank having avoided potential disruption had they signaled that stronger economic forecasts would lead to a faster-than-expected move to scale back support for the economy.

U.S. stocks ended the day higher, with the S&P 500 index and Dow Jones Industrial Average closing at record highs. Yields on U.S. Treasuries on the longer end of the curve remained elevated, while those on shorter-term debt fell.

"There was just a lot of anxiety which definitely pumped up bond yields so far, but the Fed's very dovish kind of response for a quite strong economic outlook is a big sigh of relief," said Anthony Denier, chief executive of trading platform Webull.

Compared with the Fed's first pandemic-era forecasts, issued in June of last year, the projections issued on Wednesday were a remarkable turnabout after a year some worried would produce a new Great Depression, and during a pandemic that claimed more than half a million lives in the United States.

The unemployment rate is now seen falling to 4.5% by the end of this year, compared to the projection in June of 6.4%. It is forecast to fall even lower next year, reaching levels that would once have been considered near or below what economists view as full employment. The projected 6.5% growth in gross domestic product would be the largest annual jump since 1984.

After the rise in prices this year, the Fed expects inflation to fall back to 2% in 2022.

"Considering the disruption and economic upheaval of the last year, this is mind-blowing," wrote Seema Shah, chief strategist for Principal Global Investors.

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

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Comments (8)
Ignasius Bagus Satrio Suhardiyono
Ignasius Bagus Satrio Suhardiyono Mar 17, 2021 8:22PM ET
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They're happy if people broke
la popeye
la popeye Mar 17, 2021 7:41PM ET
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if inflation soars, and fed does not move, risk of hyperinflation, dollar in the river...and the poor going into the street. economy is the same for all. see venezuela...or liban...or turkey...it will not be different for usa even if the fed think differently. once the dollar fall because int are lower than inflation, you begin the imported inflation and this spirals very fast. like an airplane loosing control ....spiraling down.
Francesco Lucchesi
Francesco Lucchesi Mar 17, 2021 7:30PM ET
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well of course GDP will increase . the feds balance sheet is totally obese
Warin Pramo
Warin Pramo Mar 17, 2021 12:44PM ET
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Inflation is expected. People see to that and spend money accordingly. The markets may think and see big flow of money but I doubt the majority people walking the street are seeing much money in their hands right now.
Gold Fever
Gold Fever Mar 17, 2021 12:34PM ET
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We shall see what is “different” (aka better) about this time
Alan Rice
Alan Rice Mar 17, 2021 12:24PM ET
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The "Big Economic Boom" might be the sound of Our Biosphere Imploding. We shall see.
Roopeshakumar Shalgar
Roopeshakumar Shalgar Mar 17, 2021 12:24PM ET
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lol
Notvery Goodathis
Peteymcletey Mar 17, 2021 7:51AM ET
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thanks trump!
Jared Ryan
Jared Ryan Mar 17, 2021 7:51AM ET
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Yep! Love how dems blame him for everything negative but take credit for all the positives. Just wait a year, were all screwed
Victor Menken
Victor Menken Mar 17, 2021 7:51AM ET
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We are all going to miss him for sure
Joel Hauser
Joel Hauser Mar 17, 2021 7:51AM ET
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Cons have been saying the same pessimistic things about economy during every democrat presidency.
Semih Unalan
Semih Unalan Mar 17, 2021 2:49AM ET
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Inflation is caused by excess demand. Currently we have excess production. Printing money and keeping rates low until we reach a balance is what the fed is doing and it is exactly what it should be doing. 70s inflation was caused by the 1973 oil crisis. Different situation.
 
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