July 28, 2021

Fed now targets 2023 for start of rate hike


by Howard Schneider and Ann Saphir

WASHINGTON (Reuters) – The US Federal Reserve (Fed) on Wednesday announced that it would now expect a first interest rate hike in 2023, highlighting the improvement in the health situation in the United States, in a press release that did not mention the greater the weight of the coronavirus crisis on the economic situation.

These new projections show that a majority of the top 11 Fed officials are now forecasting at least two quarter-percentage-point rate hikes in 2023, even if they pledge for now to maintain the support to encourage the recovery of the labor market.

Fed officials previously predicted the start of the rate hike for 2024.

“Advances in vaccination have reduced the spread of COVID-19 in the United States,” the Fed said in a statement, a phrase that marks a turning point since the central bank has for 14 months conditioned any change in its monetary policy to the end of the epidemic.

The Fed has also reaffirmed its commitment to wait for “substantial additional progress” before starting to modify its policy by reducing its support.

For now, the target for the “fed funds” rate remains set between zero and 0.25%, its lowest level ever, as predicted by all economists and analysts polled by Reuters before the meeting of the Federal Open Market Committee (FOMC).

And the Fed has made it known that it will continue to buy bonds and securitized mortgages (MBS) in the markets for $ 120 billion (€ 99 billion) per month.

But its new growth, inflation and interest rate forecasts suggest that it expects a faster recovery than previously anticipated: in particular, it has raised its forecast for gross domestic product (GDP) growth. of the United States this year to 7.0% against 6.5% expected in March.

Central Bank President Jerome Powell is due to speak on the decisions adopted by the FOMC at a press conference scheduled for 6.30 p.m. GMT.

On the markets, the Fed’s press release had the main effect of a sharp rise in bond yields: that of ten-year Treasury bonds rose by nearly five basis points to 1.5413% at around 6.15 p.m. GMT against 1.4871%. twenty minutes earlier.

At the same time, Wall Street fell sharply, with the Standard & Poor’s 500 index losing 0.9%.

On the foreign exchange market, the dollar, stable before the press release, gained 0.45% against other major currencies.

(Howard Schneider and Ann Saphir, French version Marc Angrand)