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Federal Reserve moves up forecast for interest rate hikes

U.S. inflation surges
U.S. inflation surges 07:09

The Federal Reserve indicated Wednesday it may raise interest rates sooner than previously anticipated as the United States comes out of the coronavirus pandemic. But Federal Reserve Chairman Jerome Powell played down expectations, claiming discussion of the change at the Federal Reserve is highly premature.

The central bank forecasts it would raise interest rates twice by the end of 2023 after previously estimating there would be no interest rate hike until 2024.

"These projections do not represent a committee decision or plan and no one knows with any certainty where the economy will be a couple of years from now," said Powell. "More important than any forecast is the fact that whenever liftoff comes, policy will remain highly accommodative."

The Federal Reserve on Wednesday also increased its inflation projection to 3.4% for this year, up from 2.4% in its March projection. Officials expect any increase in inflation to be temporary, and forecast the rate to be 2% in the long run. Powell suggested the current increases have to do with the reopening of the economy amid a "unique situation," but if inflation moves persistently above their targets, the central bank will use its tools. 

The Federal Reserve took an optimistic stance of reaching full employment. Powell said he is confident the country is on a path to a strong labor market that shows low unemployment, high participation and rising wages for people across the board — but the larger number of job openings and number of people unemployed suggests a few things are holding back the labor supply, such as the time it for people to find new jobs, concerns about the coronavirus pandemic and childcare. He predicted a shift as people see a reduction in unemployment benefits heading into the fall.

"I would expect that we would see strong job creation building up over the summer and going into the fall," Powell said.

The central bank said progress in vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook from the pandemic remain.

Stocks immediately dipped after the release of the Federal Reserve's latest projections, with the Dow Jones down 265 points at closing and the S&P 500 was down more than 22 points. 

The Biden administration is monitoring inflation very closely, Treasury Secretary Janet Yellen, who previously served as chair of the Federal Reserve, said earlier Wednesday during an appearance before the Senate Finance Committee.

"The current burst of inflation we've seen reflects the difficulties of reopening an economy that's been shut down, seen huge swings in spending patterns and is experiencing bottlenecks," Yellen said. 

During her testimony, Yellen said the Biden administration would review its 2% inflation projection from February, but inflation this year would be higher than that. Speaking earlier this month during a trip to London, Yellen said she anticipated inflation around 3%. She has previously stated she expects the United States to reach full employment next year.

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