Markets fell after the US Federal Reserve indicated it expects to start raising interest rates in 2023, earlier than previously forecast.
Forecasts from the Fed’s latest meeting – including the so-called ‘dot plot’ which indicates where Fed members see interest rates in the near future – revealed projections that included sharply higher inflation this year and the two rate rises in two years time.
The Fed cited an improved US health situation amid the vaccine rollout and its post meeting statement dropped the longstanding reference to the pandemic being a drag on economic growth.
Projections showed a majority of Fed officials anticipating at least two quarter-point rate increases in 2023, although the Fed said it would keep policy supportive for now to boost employment and it again described the inflation surge of the past couple of months as transitory.
The yield on 10 year US Treasury bonds rose to 1.58%, up 9 basis points on the day – but that is still a long way from the most recent peak of 1.77% on March 31.
Wall Street shares fell – The Dow fell 265.66 points, or 0.77%, to 34,033.67, the S&P 500 lost 22.89 points, or 0.54%, to 4,223.7 and the Nasdaq shed 33.17 points, or 0.24%, to 14,039.68.
Overnight futures trading for the ASX showed a small single digit gain at 7am.
Oil was higher before the statement then ended lower after touching new multi year highs and gold also fell.
Earlier iron ore prices in Asia fell on weak demand with the price of the key 62% Fe Fines product from Australia delivered to northern China down $US7.78 to $214.08, a fall of more than 3%.
The Fed revealed it now expected its first post-pandemic interest rate hike to come in 2023, citing an improved health situation amid the vaccine rollout. Projections showed a majority of Fed officials anticipating at least two quarter-point rate increases in 2023, although the Fed said it would keep policy supportive for now to boost employment.
The Fed reiterated its promise to await “substantial further progress” before beginning to shift to policies tuned to a fully open economy. It also held its benchmark short-term interest rate near zero and said it will continue to buy $120 billion in bonds each month to fuel the economic recovery.
Fed Chair Jerome Powell told a post meeting media conference that Fed officials started “talking about talking about” tapering the central bank’s $US120 billion in monthly asset purchases, which officials said would continue until “substantial further progress” has been made toward the central bank’s maximum employment and 2% inflation goals.
“In coming meetings, the committee will continue to assess the economy’s progress toward our goals,” Powell said, referring to the policy-setting Federal Open Market Committee.
He wouldn’t offer guidance on the timing for any future policy shift, emphasising that more economic progress is needed before the “substantial further progress” standard is met.
Powell also made it clear the central bank would communicate with markets and the public before making a policy shift. “we will provide advance notice before announcing any decision to make changes to our purchases,” he said in an attempt to limit any ’taper tantrum’ from traders.
According to its latest economic forecasts, the Fed expects US GDP to grow 7.0% this, compared with the 6.5% forecast from its March meeting. The Fed also upped its 2023 GDP forecast to 2.4% from 2.2% expected previously.
On inflation, the Fed sees it now running to 3.4% this year, above its previous estimate of 2.4%. The central bank also slightly hiked its inflation estimates for 2022 and 2023.
Core PCE (Personal Consumption Expenditure) inflation is expected to come in at 3.0% in 2021, up from March’s forecast of 2.2%. Core PCE for 2022 is now expected at 2.1% and is projected to stay at that level in 2023.
