The Federal Reserve announced Wednesday that interest rates would likely rise by 2023, sooner than previously anticipated.
Fed Chairman Jerome Powell discussed the coming interest rate hikes at a news conference following the Federal Open Markets Committee (FOMC) meeting, during which Fed bankers signaled potentially two interest rate hikes before the end of 2023. Powell cautioned against reading too much into the projections, but the DOW Jones Industrial Average closed more than 260 points down following the announcement.
Wednesday's Fed news comes at a time when the economy is awakening after its COVID-19 slumber, with consumer prices reaching a 12-year high and inflation on the rise. Fed officials expected inflation to reach 3.4% this year, higher than the Fed's typical target of 2%.
"Inflation has increased notably in recent months," reads the opening statement from Wednesday's FOMC meeting. "The 12-month change in [consumer] prices was 3.6 percent in April and will likely remain elevated in coming months before moderating. Part of the increase reflects the very low readings from early in the pandemic falling out of the calculation as well as the pass-through of past increases in oil prices to consumer energy prices.
"Beyond these effects, we are also seeing upward pressure on prices from the rebound in spending as the economy continues to reopen, particularly as supply bottlenecks have limited how quickly production in some sectors can respond in the near term. These bottleneck effects have been larger than anticipated, and FOMC participants have revised up their projections for inflation notably for this year."
Despite the higher projections, Fed officials are confident the effects are being caused by "transitory supply effects" and they expect inflation to follw to 2.1% in 2022 and 2.2% in 2023. "The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals," a news release said.