Economy

Federal Reserve expects US economy to grow by 6.5% this year

Central bank sharply upgrades forecasts but signals no rate rises until at least 2024

US Federal Reserve chairman Jerome Powell.

Wed Mar 17 2021 - 18:36

Federal Reserve officials sharply upgraded their growth forecasts for the world's largest economy but signalled that they expected to keep interest rates close to zero until at least 2024.

The median estimate from Fed officials now predicts that the US will grow by 6.5 per cent this year, compared with 4.2 per cent in its December forecast.

The rosier projections from the Fed came at the end of a two-day meeting of the Federal Open Market Committee (FOMC) on Wednesday held against a backdrop of growing optimism about the US economy in the wake of US president Joe Biden's $1.9 trillion (€1.6 trillion) fiscal stimulus and the country's swift vaccination rollout.

Inflation

Core inflation is expected to rise to 2.2 per cent – above the central bank’s 2 per cent target – compared with a smaller rise to 1.8 per cent predicted in December. The unemployment rate is now forecast to fall to 4.5 per cent by the end of the year instead of 5 per cent.

READ MORE

“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,” the committee said.

The FOMC made no changes to its ultra-loose monetary policy on Wednesday, pledging to maintain rock-bottom interest rates until the economy reached full employment, with inflation hitting 2 per cent and on track to exceed that target.

It also reiterated that it would continue to buy bonds at a rate of $120 billion per month until “substantial further progress” was made towards its goals.

“The path of the economy will depend significantly on the course of the virus, including progress on vaccinations. The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook,” the FOMC said.

However, the sharp upgrade to the Fed’s summary of economic projections will test the central bank’s willingness to keep that stance in the years to come, and will intensify investor debate over when the central bank will start removing its support for the economy.

In December, the median of Fed officials’ estimates did not signal a rise in interest rates until at least 2024, an overall assessment that was unchanged on Wednesday despite the better outlook.

Rate

But four out of 18 Fed officials are now forecasting a rate increase in 2022, while seven are expecting one in 2023, signalling that US central bankers are turning more hawkish, according to Wednesday’s projections.

The Fed meeting comes at a delicate moment for the $21 trillion market for US government debt. Treasury yields, which rise as prices fall, have shot higher in recent weeks during bouts of frenetic trading as investors have revised their growth and inflation forecasts higher while also pulling forward the expected timing of the Fed’s first interest rate increase.

The sell-off accelerated on Wednesday, with the benchmark 10-year note briefly trading at its highest level since last February, at 1.68 per cent. The yield on 30-year bonds also jumped, hitting 2.43 per cent.

So far, the increase in yields is viewed by many Fed officials as a natural product of the improved outlook. While it has caught their attention, it has not been extreme enough to imperil the recovery, US central bank officials have suggested.

But Powell’s apparent willingness to tolerate the sharp rise in yields unless the moves were “disorderly” has rattled investors so far, adding fuel to the sell-off in US government debt.

“Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to US households and businesses,” the Fed added in its statement on Wednesday. – Copyright The Financial Times Limited 2021

LATEST STORIES