For the first time since the start of the COVID-19 pandemic, the Federal Reserve has bucked investor expectations and taken a more hawkish policy stance. After months of projecting near-zero interest rates through 2023, yesterday the Federal Open Market Committee forecast two rate hikes by the end of 2023. With consumer prices and spending rising in tandem of late, the revised projections are a tacit admission that recent inflation may not be as transitory as the Fed has maintained.
“Is there a risk that inflation will be higher than we think? Yes,” said chair Jay Powell. The ten-year Treasury yield increased roughly 80 basis points to 1.57 percent after the press conference.
But the Fed’s revised policy outlook was not matched by an increased medium-term inflation forecast. The central bank continues to expect an average inflation rate of 2.1 percent over the next three years. Goldman Sachs’s macro researchers interpret that to mean that “the FOMC sees the 2021 inflation overshoot, which will bring the average inflation rate since the recession began above 2 percent, as largely sufficient to accomplish its averaging goal.”
Ever since the Fed adopted an average inflation target last summer, markets have been left guessing as to the time horizon over which the Fed would target 2 percent. Yesterday’s projections suggest it will be two to three years.
Publication Date: 17 June
Publication Site: National Review