Fed Maintains Interest Rates, Continues Asset Purchases, Forecasts 2023 Rate Hike

The Federal Reserve maintained its target fed funds rate range of between zero and 0.25%. The Fed also reassured investors it will continue to support the economy via asset purchases while the U.S. recovers from the pandemic.

“The Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals,” the Fed said in a statement.

The Fed said the asset purchases help ensure a functioning financial market and help provide credit to households and businesses that need it.

The statement comes after the U.S. added 559,000 jobs in May, significantly short of the 650,000 jobs economists were expecting. The U.S. unemployment rate fell to 5.8%, its lowest level since March 2020, but the 5% rise in the consumer price index represents the highest inflation level since 2008.

All 11 members voted unanimously to maintain current rates.

Related Link: Survey: Hedge Fund Managers Aren't Worried About Inflation

2021 And Beyond: Chairman Jerome Powell discussed the Fed’s new “average inflation targeting” policy last August in which it plans to keep interest rates near 0% even after inflation levels exceed its 2% target.

On Wednesday, the Federal Reserve released new “dot plot” economic forecasts. Eleven Fed members see no change to interest rates through at least 2022. Five members forecast rates will rise by 0.25% by the end of 2022 and two members forecast a 0.5% rise. All but five members now forecast at least one rate hike by the end of 2023.

Federal Reserve members are projecting a 2021 U.S. unemployment rate of 4.5%, in line with the March estimate. The committee’s 2021 GDP growth projection improved from 6.5% to 7%. The Fed’s 2022 GDP growth rate projection remained at 3.3%. The Fed is now projecting 2021 PCE inflation of 3.4%, up from previous estimates of 2.4%.

Markets React: The SPDR S&P 500 ETF Trust SPY traded lower after the Fed announcement and was down 0.6% on the day. The yield on 10-year U.S. Treasury bonds increased slightly on Wednesday to 1.526%, up 0.027% on the day.

Photo credit: Dan Smith via Wikimedia Commons