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Fed holds rates at near zero, projects two possible rate hikes by end of 2023

·Reporter
·3-min read

The Federal Reserve on Wednesday held interest rates at near-zero but optimism over the progression of the U.S. economic recovery spurred more Fed officials to pencil in rate hikes by the end of 2023.

The Fed also reiterated for now its commitment to its asset purchase program, which is absorbing about $120 billion a month in assets.

“Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain,” the Federal Open Market Committee said in a statement.

A fresh round of its quarterly economic projections reflected the central bank’s optimism over the economic outlook, with 13 of the FOMC’s 18 members projecting at least one rate hike by the end of 2023.

The Fed's June 2021 Summary of Economic Projections show the median member of the central bank's policy-setting committee seeing the case for two rate hikes by the end of 2023. Source: Federal Reserve
The Fed's June 2021 Summary of Economic Projections show the median member of the central bank's policy-setting committee seeing the case for two rate hikes by the end of 2023. Source: Federal Reserve

The median member of the FOMC in the so-called “dot plot,” which maps out each member’s expectations for rates over coming years, now expects two rate hikes by the end of 2023.

For comparison, the Fed’s dot plots in March of this year showed the median member expecting no rate hikes through that time horizon.

The upward revision suggests that the Fed sees a faster-than-expected recovery. The economic projections raised expectations for real GDP growth in 2021 to 7.0%, a notch up from March projections for 6.5%.

The Fed however, maintained its March expectation for the headline unemployment rate to end 2021 at 4.5%.

Tapering?

The Fed statement reiterated that for now the central bank will continue to purchase at least $120 billion a month in agency mortgage-backed securities and U.S. Treasuries as part of its quantitative easing program.

The decision to hold interest rates at near-zero was unanimous among the voting members of the FOMC.

But chatter is building within the central bank over kicking off discussions about when to begin slowing the pace of those purchases. Those eager to begin the “taper talks” have also expressed concern over the risk of rising inflation.

The FOMC’s Summary of Economic Projections show the median member of the committee viewing inflation rising at a faster clip than its last round of forecasts in March, expecting core personal consumption expenditures (the Fed’s preferred measure of inflation) clocking in at 3.0% in 2021 (compared to 2.2% in its March forecast).

The Fed’s inflation target is 2%.

Other changes

The Fed also made a technical change by saying it would raise the interest it pays on reserves and excess reserves, from 0.10% to 0.15%.

The tweak does not change the Fed’s interest rate target, which remains unchanged at a range between 0% and 0.25%. But banks, swelling with deposits amid the Fed’s money printing, have been lending overnight funds at rates closer to the bottom of that range.

Raising the interest it pays on reserves by 5 basis points should in theory move the effective interest rate closer to the middle of its range.

The Fed also announced it would extend its temporary U.S. dollar liquidity swap lines with nine central banks through December 31, 2021. The swap lines were originally set to expire in September 2021.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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