Fed officials signal at least three interest rate rises in 2023

Federal Reserve officials expect to raise interest rates at least three times in 2023 and are preparing to start withdrawing the US central bank's enormous stimulus programme by the end of the year.

At the end of the two-day meeting on Wednesday, the Federal Open Market Committee (FOMC) kept its main interest rate on hold at the rock-bottom range of 0 to 0.25 per cent while pencilling in a faster transition to tighter monetary policy once interest rates are lifted.

New projections suggest at least one more interest rate increase is expected than officials had predicted in June, bringing the total to at least three, in a sign that the US economic recovery is advancing more quickly than anticipated. At the start of the summer, most Fed officials predicted at least two interest rate increases in 2023.

Nine officials predicted the first interest rate increase would happen next year, while the other nine expected liftoff in 2023.

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The accelerated timeline for interest rate increases was accompanied by explicit clues that the Fed will this year begin scaling back the $120 billion (€102 billion) asset purchase programme it introduced to shore up financial markets and the economy at the onset of the pandemic.

The Fed pledged to buy Treasuries and agency mortgage-backed securities at that pace until it sees “substantial further progress” towards inflation that averages 2 per cent and maximum employment. On Wednesday, it acknowledged progress towards those goals.

“If progress continues broadly as expected, the committee judges that a moderation in the pace of asset purchases may soon be warranted,” the Fed said in a statement.

Inflation

The Fed’s new set of economic projections suggested more elevated inflation than initially expected in June, when the median FOMC participant saw the core measure at 3 per cent in 2021 and 2.1 per cent in 2022. Now, those estimates have increased to 3.7 per cent and 2.3 per cent, respectively. The unemployment rate is set to steady at 4.8 cent this year, slightly higher than June’s forecasts, while gross domestic product growth is slated to moderate.

Fed officials see the economy expanding 5.9 per cent this year, compared with 7 per cent in June, before slipping further to 3.8 per cent in 2022.

The Fed meeting comes at a tenuous time for financial markets, which suffered the biggest sell-off in months this week amid worries about potential contagion from the liquidity crisis hamstringing China's Evergrande, the world's most indebted developer. – Copyright The Financial Times Limited 2021