Interest rates held near zero but Fed expects two increases by 2023

06/24/2021   |   By Chahinez Dib

The Federal Open Market Committee (FOMC) announced in a statement released last Wednesday they kept interest rates close to zero percent, but Federal officials expect two increases by 2023.

“The Committee seeks to achieve maximum employment and inflation at 2 percent over the longer run,” reads the statement from FOMC. 

With the progress of vaccinations in the U.S. and COVID-19 cases dwindling, state governments continue to lift social distancing restrictions. According to Federal officials, indicators of economic activity and employment have strengthened.

“Real [gross domestic product] this year appears to be on track to post its fastest rate of increase in decades,” says chair Jerome Powell in a press conference on June 16th. 

Since the pandemic started in the U. S—in March 2020—the central bank has held the target range at zero to 0.25 percent and expects to maintain it until employment and inflation have risen to two percent.

According to the press release, the FOMC maintained their asset purchases and will continue to increase its holdings of Treasury securities by at least $80 billion per month. The agency mortgage-backed securities will also increase by 40 billion. These increases will continue until they have made substantial further progress on inflation and employment.

“These measures, along with our strong guidance on interest rates and our balance sheet, will ensure that monetary policy will continue to deliver powerful support to the economy until the recovery is complete,” says Powell. 

But while household spending has been rising at a solid pace, the unemployment rate declined by 0.3 percentage point to 5.8 percent in May—which is well above its February 2020 level of 3.5 percent.

“Factors related to the pandemic such as caregiving needs, ongoing fears of the virus, and unemployment insurance payments appear to be weighing on employment growth,” adds Powell during the press conference.

“But these factors should wane in coming months against a backdrop of rising vaccinations leading to more rapid gains in employment,” continues the FOMC chair.

According to the U.S. Bureau of Labor Statistics (BLS), significant job gains occurred in multiple sectors such as leisure and hospitality, public and private education and health and social help.

As for inflation, this one continues to rise. The 12-month change in Personal Consumption Expenditure (PCE) prices was 3.6 percent in April and will probably remain elevated in coming months before moderating, according to Powell. 

“Inflation is expected to drop back toward our longer run goal and the median inflation projection falls from 3.4 percent this year to 2.1 percent next year and 2.2 percent in 2023,” he says.

According to the report, the May CPI inflation report from the BLS highlights prices climbed 5 percent year over year—the most significant 12-month increase since August 2008. 

A few components of the May CPI inflation report saw huge gains, such as used cars and trucks—which were 7 percent more expensive in May than April. The food index increased 0.4 percent in May, while gas prices slightly decreased in May compared with April. However, the gas prices are up 56 percent this time from last year, the most significant 12-month increase since April 1980.