Fed Keeps Zero-Rate Outlook, Sees Inflation Bump as Short-Lived

Federal Reserve officials continued to project near-zero interest rates at least through 2023, while upgrading their economic outlook to reflect greater optimism over the U.S. recovery from Covid-19 amid a surge in Treasury yields.

“Following a moderation in the pace of the recovery, indicators of economic activity and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak,” the Federal Open Market Committee said in its policy statement Wednesday. “Inflation continues to run below 2%.”

Seven of 18 officials predicted higher rates by the end of 2023 compared with five of 17 at the December meeting, showing a slightly larger group who see an earlier start than peers to the withdrawal of ultra-easy monetary policy, according to the FOMC’s quarterly economic projections also issued Wednesday.

The Fed expects that a bump in inflation this year will be short-lived. Officials saw their preferred measure of price pressures slowing to 2% next year following a spike to 2.4% in 2021, according to the projections.

Excluding food and energy, inflation is forecast to hit 2.2% this year and fall to 2% in 2022.

Massive fiscal support and widening vaccinations that will help reopen the economy have buoyed investor expectations for rate increases and inflation, propelling Treasury yields higher as the Fed keeps adding stimulus.

Wednesday’s decision was unanimous. Fed Chair Jerome Powell will hold a virtual press conference at 2:30 p.m. in Washington.

Asset Purchases

U.S. central bankers left asset purchases unchanged at $120 billion a month and repeated that this pace would be maintained until “substantial further progress” is made on their employment and inflation goals.

The target range of the benchmark federal funds rate was also kept at zero to 0.25%, where it’s been since last March.