The US central bank said economic activity and the labor market have strengthened due to strong political support and advances in vaccines.
Meanwhile, the Federal Reserve continues to reiterate its view that the rise in inflation will be transient.
“The sectors most affected by the pandemic remain weak but have improved. Inflation has increased, largely reflecting transient factors, ”the central bank said in its monetary policy statement. “Overall financial conditions remain accommodative, in part reflecting policy measures aimed at supporting the economy and the flow of credit to US households and businesses. The trajectory of the economy will depend significantly on the evolution of the virus. Advances in immunization are likely to continue to diminish the effects of the public health crisis on the economy, but risks to the economic outlook remain. “
Gold prices fell sharply into negative territory, abandoning all of their session gains. Prices also fell below critical initial support at $ 1,850 per ounce. August gold futures traded for the last time at $ 1,844.20 an ounce, down 0.66% on the day.
However, what is attracting the most attention in the market is the change in expectations regarding interest rates. The projections, also known as dot plots, show that the central bank is forecasting interest rates at 0.6% in 2023, which would indicate two interest rate hikes during the year. In March, projections do not predict any rate hikes until 2023.
“The dot plot is the big story of the early days,” said Adam Button, chief currency strategist at Forexlive.com. “Seven FOMC members saw no hikes in 2023, but 13 do now. What’s even more striking is that seven of them are now seeing at least an increase in 2022, which is as much as there was in 2023 just three months ago. They have arguably shifted the pace of hikes for a full year in just three months. “
Summary of economic projections
As for growth, the Federal Reserve expects U.S. gross domestic product to grow 7.0% this year, compared to the previous forecast of 6.5%. By 2022, the central bank predicts that GDP will grow by 3.3%, unchanged from the March forecast. Meanwhile, by 2023, GDP growth is expected to increase by 2.4%, up from 2.2% previously forecast.
The US central bank is also optimistic that the labor market will continue to recover after the devastation of 2020 due to the COVID-19 pandemic. For 2021, the unemployment rate is expected to fall to 4.5%, unchanged from the March reading. The unemployment rate is expected to be 3.8% for next year, down from the previous estimate of 3.9%. In 2023, the unemployment rate is expected to fall to 3.5%, unchanged from the previous estimate.
The US central bank is also forecasting rising inflationary pressures. Projections show that the personal consumption expenditure index (PCE) is expected to increase by 3.4% in 2021, from 2.4% in March. Inflationary pressures are expected to continue to rise in 2022, with PCE increasing 2.1% from 2.0% in March. In 2023, the Federal Reserve expects inflation to reach 2.2%, up from the previous forecast of 2.1%.
Core inflation expectations, which exclude volatile food and energy prices, are expected to rise 3.0% this year, up from the previous estimate of 2.2%. Core inflation is expected to moderate next year, rising 2.1% from March’s 2.0% forecast. In 2023, inflation is expected to reach 2.1%, unchanged from the previous estimate.
Avery Shenfeld, senior economist at CIBC, described the Federal Reserve’s monetary policy statement as it did not address any potential cuts to the central bank’s bond buying program.
The Canadian bank is also more hawkish on interest rates than the Federal Reserve.
“Neither a spike in inflation nor a growth rate in the second quarter that we believe could exceed 9% could really shake the Fed from its accommodative stance, although the latest FOMC news gives a subtle sign of the head in that direction, ”Shenfeld said. . “The only hawkish note is that the median federal funds forecast shows a 50bp increase to 0.6% in 2023, compared to a projection of no change in the latest forecast. This is a step in our view towards a more realistic assessment of what monetary policy might look like, as we doubt inflation can stay that low in 2022 with an unemployment rate below 4%. We have this increase of half a point a year earlier, in H2 2022. ”
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