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Economic outlook for the year cut as inflation increases.
The Federal Reserve held benchmark interest rates near zero for now, but indicated a rate hike will be coming. The central bank also cut its economic outlook for the year. Both moves were expected by economists.
COVID-19 continues to be a major factor, with the bank stating the path of the economy continues to depend on the course of the virus. “Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain,” said a statement from the Federal Reserve.
The Federal Open Market Committee said it will start pulling back some of the stimulus it has been providing, but there was no indication when that will happen. Many economists predict a tapering of bond purchases to start in December.
Even though the committee voted unanimously to keep short-term rates where they are, more members now see a rate hike happening in 2022. In June, a majority indicated they thought it would be 2023.
The Fed also made changes to some of its economic forecasts, with a decrease in the growth outlook and higher inflation expectations. GDP growth has been cut to 5.9% compared to the 7% forecast in June, but 2023 growth is set at 3.8% compared to 3.3% previously.
Core inflation is projected to increase 3.7% this year, compared to the 3% June forecast, and see inflation at 2.3% for 2022 instead of the original projection of 2.2%. The bank’s preferred inflation measure – the personal consumption expenditures index less food and energy prices – increased 3.6% in July, the highest level in 30 years. However, Federal Reserve Chairman Jerome Powell has said he expects price pressures to subside as supply chain factors, goods shortages, and unusually high levels of demand return to pre-pandemic levels.
According to economists, markets didn’t expect much in the way of major decisions, but were worried about when the Fed would start reducing the pace of its monthly bond purchases.