Federal Reserve officials left policy unchanged on Wednesday but moved up expectations for when they would first raise interest rates from rock bottom, a sign that a healing labor market and rising inflation were giving policymakers confidence that they would achieve their full employment and stable price goals in coming years.
Fed policymakers expect to make two interest rate increases by the end of 2023, the central bank’s updated summary of economic projections showed Wednesday. Previously, the median official had anticipated that rates would stay near zero — where they have been since March 2020 — at least into 2024. The Fed now sees rates rising to 0.6 percent by the end of 2023, up from 0.1 percent.
The significant upgrade comes as the economy is healing, and as Fed officials penciled in stronger growth in 2021, faster inflation and slightly quicker labor market progress next year.
“Progress on vaccinations has reduced the spread of Covid-19 in the United States,” the Fed said in a statement released at the conclusion of its June 15-16 policy meeting, one that contained several optimistic revisions. “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.”
Jerome H. Powell, the Fed’s chair, sounded a more optimistic tone about the economic outlook than just a few months ago, saying at a news conference that “we’re going to be in a very strong labor market pretty quickly here.”
Still, he cautioned that the Fed was in no rush to raise interest rates and that “whenever liftoff comes, policy will remain highly accommodative.”
“Discussing liftoff now would be highly premature,” he said, as he repeatedly de-emphasized the rate projections. He cautioned later in the news conference that the economy is “not out of the woods at this point and it would premature to declare victory.”
Stocks sold off after the Fed’s announcement and gathered pace after Mr. Powell began his news conference at 2:30 p.m. The S&P 500 was down nearly 1 percent shortly before 3. Bond markets also shifted, with the yield on the 10-year Treasury note rising sharply to 1.56 percent, as traders priced in the chance that the Fed could raise interest rates slightly more quickly than previously expected.
“It’s a pretty big shift,” Michelle Meyer, head of U.S. economics at Bank of America, said after the release and before Mr. Powell’s remarks. She said the data suggested that higher inflation was making officials antsy, and eager to roll back policy support sooner.
“Many members of the committee are getting uncomfortable with what they see in the data,” she said, but “the question is where the core of the committee is.”
Economic data have offered a series of surprises since the Fed met in late April, and since it last released economic projections in March. Inflation data have come in faster than officials had expected, and consumer and market expectations for future inflation have climbed. Employers have been hiring more slowly than they were this spring, as job openings abound but it takes workers time to flow into them.
The Fed continued to call that inflation increase largely “transitory” in its new statement. It has consistently pledged to take a patient approach to monetary policy as the economic backdrop rapidly shifts.
Mr. Powell acknowledged that “inflation has come in above expectations” but suggested it was largely because of robust consumer demand coupled with shortages and bottlenecks as the economy reopens.
“Our expectation is that these high inflation readings that we’re seeing now will start to abate,” he said, adding that if prices moved up in a way that was inconsistent with the Fed’s goal, central bankers would be prepared to react by reducing monetary policy support.
The central bank made no changes on Wednesday to its main policy interest rate, which has been set at near zero since March 2020, helping keep borrowing cheap for households and businesses. The Fed will also continue to buy $120 billion in government-backed bonds each month, which keeps longer-term borrowing costs low and can bolster stock and other asset prices. Those policies work together to keep money flowing easily through the economy, fueling stronger demand that can help to speed up growth and job market healing.
Officials have pledged to continue to support the economy until the pandemic shock is well behind the United States. Specifically, they have said that they want to achieve “substantial” progress toward their two economic goals — maximum employment and stable inflation — before slowing their bond purchases. The bar for raising interest rates is even higher. Officials have said they want to see the job market back at full strength and inflation on track to average 2 percent over time before they will lift interest rates away from rock bottom.
Based on central bankers’ fresh projections released Wednesday, the median Fed official expects to achieve those goals by late 2023. The Fed’s so-called dot plot of interest rate projections showed that more than half of its 18 officials expect rate increases by the end of that year. More, but not quite half, expected an increase or two in 2022.
Fed officials also tweaked their economic estimates. They now see inflation averaging 3.4 percent in the final three months of 2021, before stripping out volatile food and fuel. They expect that headline inflation gauge to retreat quickly, however, falling to 2.1 percent next year and 2.2 percent in 2023.
Wall Street has been eager to hear the Fed’s latest assessment of inflation as it tries to gauge whether the central bank might start to dial back its support for the economy faster than expected. If that happened, it would weigh down stock prices and could roil bond markets.
The Fed’s view of inflation is also being closely watched in Washington as President Biden tries to rally congressional support for his ambitious and expensive economic agenda.
Persistently higher inflation could make it more difficult for Democrats to make a case for additional spending on priorities like infrastructure, even though the suggested outlays would trickle out over time. Republicans have blasted the spike in prices as a sign of economic mismanagement, while the White House insists that higher prices are likely to fade over time.
“The current burst of inflation we’ve seen reflects the difficulties of reopening an economy that’s been shut down,” Janet Yellen, the Treasury secretary, said in response to lawmaker questions during testimony before the Senate Finance Committee earlier on Wednesday.
Slowing down bond buying is likely to be the first step in the process toward a more normal monetary policy setting. Because the economy is healing, a “number” of officials at the Fed’s April meeting suggested that they would like to start talking about how and when to begin the so-called taper soon, minutes from that gathering showed.
The Fed is buying $80 billion in Treasury bonds each month, and $40 billion in mortgage-backed securities. Those purchases have helped to push the central bank’s balance sheet holdings up to about $8 trillion — roughly twice as big as they were as recently as summer 2019.
Officials including Robert S. Kaplan, the president of the Federal Reserve Bank of Dallas, and Patrick Harker, the president of the Federal Reserve Bank of Philadelphia, have signaled that they think it would be appropriate to get those discussions going. Other important policymakers have sounded patient, with John Williams, the New York Fed president, saying that “we’re not near the substantial further progress marker,” in a June 3 Yahoo Finance interview.
Mr. Powell said on Wednesday that officials had begun “talking about talking about” slowing those bond purchases but that the central bank was not preparing to start tapering anytime soon.
“I expect that we’ll be able to say more about timing as we start to see more data,” Mr. Powell said.
Some Republican politicians have questioned whether emergency monetary policy settings remain necessary as the economy reopens and growth rebounds, the Fed has signaled over that the United States is in for a long period of central bank support.
That owes in part to its new policy strategy. The economy experienced years of plodding growth after the 2007 to 2009 recession, and inflation drifted lower, threatening a downward spiral. In light of that, the Fed adopted a new approach to monetary policy last summer that shoots for periods of slightly higher inflation while aiming for full employment as an “broad-based and inclusive” goal.
Given its new framework, the Fed is willing to tolerate periods of inflation above 2 percent. That is relevant now, given that its preferred inflation gauge came in at 3.6 percent in April compared to the previous year and is likely to jump even higher in May. The more up-to-date Consumer Price Index was up 5 percent in the year through last month, partly as the figures were compared to very low readings last year.
Officials expect the current price pop to prove temporary, the product of one-off data quirks and the fact that demand is recovering faster than supply chains coming out of the pandemic. Markets seem to broadly share that view: While they have penciled in slightly higher inflation, that recent increase in expectations appears to be stabilizing at a level that is probably more or less consistent with the Fed’s goals.
Still, Wall Street strategists and politicians in Washington alike are watching for any sign that Fed officials have become more concerned about lasting price pressures as some stickier prices in the real economy — such as shelter costs — stabilize and increase.
If inflation does take off in a lasting way and the Fed has to lift interest rates to slow the economy and tame price pressures, that could be bad news. Rapid rate adjustments have a track record of causing recessions, which throw vulnerable workers out of jobs.
But the Fed tries to balance risks when setting policy, and so far, it has seen the risk of pulling back support early as the one to avoid. Millions of jobs are still missing since the start of the pandemic, and monetary policy could help to keep the economy recovering briskly so that displaced employees have a better chance of finding new work.
Alan Rappeport and Matt Phillips contributed reporting.