Fed improves economic forecasts and keeps interest rates zero until 2023

The Fed meeting ended on Wednesday with the expected statements. The stock market reacted with growth, the US dollar declined against a basket of major currencies.

The Fed’s two-day March meeting ended Wednesday with predictable announcements of keeping rates at zero, but the central bank has changed its economic forecasts and positions on several issues from the statements made in December last year.

During this period, between scheduled meetings of the FOMC, the Federal Open Market Committee of the Federal Reserve, the US government passed two bills to help the economy, amounting to $ 900 billion in December and $ 1.9 trillion. Last week, in addition, a large-scale vaccination of the population was carried out, which should end the COVID-19 pandemic.

More optimistic-than-expected statements from the Fed have boosted optimism in the stock market and the indices reacted with gains at the close of trading on Wednesday, analysts said: the Dow Jones rose 0.58%, the S&P 500 added 0.29%, and the Nasdaq Composite index 0 , 40%.

Amazon (AMZN) rallied 1.4% and had the biggest impact on the S&P 500, while Apple’s 0.65% fall (AAPL) had more impact on the index than any other stock.

Following the Fed’s announcements, the US dollar declined against a basket of major currencies.

The main statements of the Fed following the meeting on March 16-17 were as follows:

  • US central bank interest rates remain in the range of 0% to 0.25% until the end of 2021, while officials do not expect an increase until 2023.

The Fed’s so-called point forecasts have remained largely unchanged, and most members still expect rates to remain close to zero through 2023. However, the number of revised positions has grown as expected: four of the 18 FOMC members are now expecting rate hikes at some point in 2022, up from one at the December meeting. Seven members already see a rate hike in 2023, up from five in the December forecast.

  • The central bank, against the backdrop of economic growth and improvements in the labor market, raised its forecast for real GDP (gross domestic product) from 4.2% growth in 2021 (based on the results of the December meeting) to 6.5%.

The Fed also raised its forecast for real GDP for 2022 to 3.3% from the previously expected 3.2%.

  • The Fed has improved its forecast for the unemployment rate – it is now expected to fall to 4.5% in 2021, up from the previous estimate of 5.0%.

The FOMC’s forecast for unemployment rates in 2022 and 2023 fell to 3.9% and 3.5%, respectively.

  • The central bank predicts inflation will reach 2.4% this year, higher than its previous estimate of 1.8%.

The Fed also raised its estimates of core inflation (PCE excluding fuel and food prices) in 2021 to 2.2%, up from its December forecast of 1.8%. Core inflation is expected to be 2.0% and 2.1% in 2022 and 2023, respectively.

Sima Shah, chief strategist at investment firm Principal Global Investors, noted that such a sharp increase in the Fed’s forecast for economic growth for 2021 (GDP growth to 6.5%) suggests that at some point in 2022, US GDP will exceed its level before the pandemic.

“Despite this very strong outlook, the Fed is downplaying inflation risk as its forecasts show very modest and, importantly, only temporary surpasses of their 2% target – certainly a more modest inflation outlook than many investors feared,” Shah added. … “Equity markets should find some confidence in these predictions, although there is likely to be some concern in the bond market due to the latest dot chart, which showed several more FOMC members think they may start raising interest rates in 2023.”

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