U.S. Federal Reserve predicts zero interest rate and a short-term inflation increase

The U.S. Federal Reserve Chair Jerome Powell keeps expecting near-zero interest rates at least in 2023, even though the Fed has upgraded its economic outlook and markets are showing stronger worries over inflation.

Such a decision followed a Treasury yields hike, hiding a growing number of officials who predicted an increase earlier. However, Powell says it was still a minority opinion.

“The majority of the committee members don’t expect a rate hike over this forecast period,” – Powell said, noting that it’s not the time yet to think about reducing the central bank’s asset purchase program.

Now, 7 of 18 officials expect rate increases by the end of 2023 compared with 5 of 17 reported in December.

“The results of economic activity and employment have risen lately, although the sectors most affected by the pandemic are still weak,” – the FOMC noted. “Inflation keeps running below the necessary 2%.”

According to the Fed, the inflation increase in 2021 will be short-term. Officials expect it to slow down to 2% in 2022 after a rise to 2.4% this year. In case we exclude food and energy from calculation, inflation may reach 2.2% in 2021 and fall to 2% next year.

Strong fiscal support combined with widening vaccinations that will support the economy reopening have increased investor expectations for rate hikes and inflation. As a result, the Treasury yields were up as the central bank and federal government continue the stimulus.

U.S. central bank still keeps purchasing assets for US$120 billion each month, saying this pace will not change until we see a significant progress in terms of employment and inflation goals. Powell noted that the Fed will signal well in advance when we are close to the threshold.

Nevertheless, the economy is still far from the Fed’s goals. Although there were 379,000 new jobs added last month, 9.5 million fewer Americans have jobs now than a year earlier. In addition to it, the inflation stays well below the Fed’s 2% target.