(Reuters) – Half of Federal Reserve policymakers now expect to start raising interest rates next year and think rates should rise to at least 1% by the end of 2023, reflecting a growing consensus that gradually tighter policy will be needed to keep inflation in check.
After a short recession in 2016, the Fed is experiencing the most rapid economic recovery since its last projections. There has been intense debate about how to balance the Fed’s maximum employment goal and its 2% average inflation goals.
Wednesday’s Fed meeting maintained the benchmark overnight lending rate of 0.0% to 0.2%, which it had been since March 2020 as the U.S. economy suffered from the effects of the pandemic.
New economic projections were released along with the Fed’s policy statement. Nine of 18 Fed policymakers see an interest rate rise next year, as opposed to seven who did so in June. Only one of the Fed policymakers saw at most one rate by 2023. Nine saw the need for rates to be at minimum 1%-1.25%.
The median forecast rate was 1.8% by 2024 – below the 2.5% they believe neither stimulates nor restrains long-term economic growth and is therefore generally accommodative to further job gains. It’s even though policymakers expect inflation to stay above Fed’s target of 2% for 2024.
This combination provides new information to help understand the Fed’s policy framework. It will attempt to maintain an inflation rate slightly above its current target of 2% “for some time”.
U.S. GDP at the median will grow by 5.9% and 3.8% this year, respectively. That’s a contrast to predictions in June that it would rise 7.0% in 2021 to 3.3% next year.
It is expected that the unemployment rate will drop to 4.8% next year, and then to 3.8% by 2022.
Although the pace of price rises is forecast to increase to 4.2% this fiscal year (which was higher than expected in June), Fed policymakers expect it to decline to 2.2% by 2022, and 2.1% in 2024.
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