The Federal Reserve has sharply raised its forecast for the U.S. economy this year, projecting GDP growth of 6.5 percent in 2021, compared with a forecast of only 4.2 percent last December. Along with GDP growth, the Fed expects the unemployment rate to fall to 4.5% this year from the current 6.2%, compared to last December’s forecast of 5%. the unemployment rate for 2022 and 2023 is forecast at 3.9% and 3.5%, respectively.
For market concerns about Inflation, the Fed has significantly increased inflation expectations this year, with the median PCE inflation expectation of 2.4% at the end of 2021, compared to 1.8% expected in December last year; and the median core PCE inflation expectation of 2.2% at the end of 2021, compared to 1.8% expected in December last year. In contrast, inflation expectations for 2022 and 2020 were only slightly revised upward by 0.1%, and inflation in the next two years is significantly lower than this year.
It is worth noting that the dot plot still shows that the Fed will not raise interest rates until 2023, although the number of people in favor of raising interest rates has grown. Four of the 18 members of the Federal Open Market Committee seek a rate hike in 2022, compared with just one at last December’s meeting. Seven members support a rate hike in 2023, compared with five last December.
In recent weeks the market had expected the Fed might adjust its asset purchase program to buy more long-term bonds to intervene in the rise in U.S. bond yields, but there was no sign of doing so in Wednesday’s rate resolution. The Fed believes 2% inflation is a healthy level for the economy, and if inflation gets out of hand, Fed officials believe they have the tools to control it.
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