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Fed Sees Brighter Outlook, but Keeps Rates Steady; No Hike Through 2023

Published 03/17/2021, 02:00 PM
Updated 03/17/2021, 02:23 PM
© Reuters.

© Reuters.

By Yasin Ebrahim

Investing.com - The Federal Reserve kept interest rates and its monthly pace of bond buying unchanged Wednesday, and continued to signal that rates will remain near-zero through 2023 even as it acknowledged an improved economic backdrop.

The Federal Open Market Committee left its benchmark rate unchanged in the range of 0% to 0.25% and said it would continue its $120 billion monthly bond purchases.

"Following a moderation in the pace of the recovery, indicators of economic activity and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak. Inflation continues to run below 2 percent," The Fed said in a statement.

The central bank's policymakers appear in no hurry to hike rates, continuing to back rates to remain near-zero through 2023.

The Fed’s interest-rate outlook for 2021 through 2023 was 0.1%, unchanged from previous projections in December, the Fed’s Summary of Economic Projections showed.

The unchanged guidance on interest rates comes even as the Federal Reserve upped its outlook on growth and inflation in the wake of an improving economic backdrop amid a boost from stimulus and vaccine deployments.

The economy is expected to grow by 6.5% in 2021, and 3.3% in 2022, up from previous estimates of 4.2% and 3.2% respectively.

The Fed's efforts have been helped by a wave of unprecedented pandemic fiscal relief measures undertaken by the U.S. government. The latest fiscal relief package, the $1.9 trillion American Rescue Plan, together with the faster pace of vaccine roll outs have added fuel to the recovery.

But the improving economic backdrop has sparked inflation and U.S. bond yields into life, stoking speculation over whether the Fed will have to tighten policy sooner than expected.

The pace of inflation is forecast to improve to 2.4% in 2021, and 2.0% in 2022, compared with prior estimates of 1.8% and 1.9% respectively. Looking ahead to 2023, inflation is projected to reach the 2.1% target, up from 2% previously, though the Fed has reiterated that it would let inflation run above target for some time.

The updated guidance on inflation is in keeping with the Fed's narrative that the post-reopening inflation boom will be short-lived.

The second part of the Fed's dual mandate - to achieve maximum employment – has also justified its accommodative stance somewhat as the unemployment rate at 6.2% remains above pre-pandemic levels.

The unemployment rate for the 2021 is expected to come in at 4.5%, down from 5% previously, and fall further to 3.9% next year, down from a previous estimate of 4.2%. The unemployment rate was estimated to improve further, and eventually drop to 3.5% in 2023, down from a prior estimate of 3.7%.

Looking ahead, market participants expect the Fed to stick with its commitment to let inflation run hot, allowing bond yields to move higher as the central bank looks to achieve full employment.

“Breakevens are starting to price over 2% to almost 2.3% inflation so the market is fully expecting inflation, though I believe that the Fed is going to stay true to their words,” David Wagner, a portfolio manager at Aptus Capital Advisors, said in an interview with Investing.com. "The Fed is in a tough spot and isn't renowned for being proactive ... and will likely let the market push rates higher until something really breaks before [deciding] to act."

Fed chairman Jerome Powell suggested that the tapering was still a ways off as the economy has yet to achieve substantial economic growth. An eventual taper of bond purchases will be signaled well in advanced, the fed chief added.

"We will give a signal that we're on a path to possibly achieve substantial growth to consider tapering. I think what we've learned from the experience of these last dozen years, is to communicate very carefully, very clearly, [and] well in advance …" Powell said.

Latest comments

What will be the mkt sentiment today ?
freaking rocket ship!!! 🚀
I now understand. Want to earn money? Then act exactly opposite what comments say
Want to make money? Disregard common sense and logic, trade accordingly.
Let’s see FED on 3.5 inflation!
considering economy recovery with not rates hike... dollar backkk
Hair not long enough for tapering, Fed said. It added that I am not going to cut your hair until 2023 no matter how long your hair is. Or, even I know most of you don't need the drug, but since you said you feel needing the drug as comfort food, I am prescribing it anyway and let us have the drug till 2023 and don't worry about the withdrawal syndromes, even i know you have to face that day anyway. For those Zombies, just keep them alive, even they are eating up our resources and productivity ! What are these people in US doing?
It’s frightening to imagine the end game of all this
If there is no inflation why did gold and crypto go up? BS
so grandma will have to shack up with 4 other grandmas and pool their social security money to pay rent..doh!
They will have to add more than $ 120 Billion monthly to buy the 30 year Bond along with junk Corporate Debt
Through 2023 only? Definitely not enough. I insist it till 2029.
Speech ignoring current circumstance and pushing the dollar lower for now. Market forces will prevail and reverse the dollar much higher and yields higher. Setting up for a shock to the system. As expected though. FED can't do anything to rock the boat. Seem the tidal wave will do that for them.
So the FED not only leaves the IV in, but adds some extra juice.  How much further will the US Ponzi Scheme, biggest investment joke in the world, get criminally inflated now?
actual inflation will be 10-20%. not the fake inflation that they changed multiple times over the past 4 decades.
😋😋😋
So stocks will rise again
All the angst from the top analyst about rate increase were done to line their pockets when investors panicked, when in reality their were no reason for them to talk up higher rates then that.
toilet paper
Here we go...with the Brighter Outlook/Optimism nonsense
but is it difficult to operate here in Zambia
will not raise rates untill Q2 atleast, may be extended till Q3 too
of 2023 not 2021.
Sale those puts ;)
Not sure, what government is doing to control current economy situation, How many time Govt. will print money!! for what to save heir government in rule!! Do you really think all debt currently we have and keep rising will lead us where???
Bull trap! Next week will say oops we cant hold this steady any longer
hi
hi
Nice Spin...they have to keep rates low or the markets will implode. As for the Economy warming up....well...c;mon. Almost 50K small businesses have disappeared forever that's over 40% of GDP. Stop pumping stocks and start telling the truth...
Billionaires have the fed and govt by the cohones. Stonks are no longer allowed to go down.
yeap there will be correction along the way. but it wont crash like most people hope.
This is now the new "Norm".
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