While the Federal Reserve decided to keep interest rates steady this week, it adjusted its forecast for inflation and accelerated the timeline for a rate hike.
Officials indicated they plan to raise interest rates by late 2023, a departure from their March prediction which called for no rate hikes until 2024. Federal Reserve officials projected they will lift the benchmark rate to 0.6% from near zero by the end of 2023. In March, they reported plans to hold the rate steady until 2024.
Federal Reserve officials attributed the shift to a rapidly expanding post-pandemic economy and escalating inflation.
In a statement, the Federal Reserve projected inflation will hit 3.4%, up from the March projection of 2.4%. The statement blamed higher than expected inflation on the “greater than anticipated” impact from bottlenecks in the supply chain.
Stocks fell after the Federal Reserve announcement. The Dow Jones Industrial Average, which had fallen by 146 points earlier, plummeted another 150 points after the statement.
“This is not what the market expected,” James McCann, deputy chief economist at Aberdeen Standard Investments, told CNBC. “The Fed is now signaling rates will need to rise sooner and faster, with their forecast suggesting two hikes in 2023. This change jars a little with the Fed’s recent claims that the recent spike in inflation is temporary.”
Federal Reserve Chairman Jerome Powell explained the reason for shifting expectations in a news conference. “This is an extremely unusual time, and we really don’t have a template or any experience in a situation like this,” he said.
He stood by his stance that the current inflation rate is transitory and stressed the inflated cost of lumber and used cars that are driving it up, will “reverse over time.”
He added, “These very specific things that are driving up inflation will be temporary. High inflation readings will start to abate. There’s no reason for supply and demand to be out of whack.”