Most Fed officials thought that current rates would remain in place until 2024 at the earliest
Officials at the Federal Reserve are anticipating a rise in interest rates in 2023, earlier than previous estimates.
The news comes on the back of economic forecasts of quicker growth and higher inflation in 2021.
Following the Fed’s policy meeting on Wednesday, which spanned two days, the US central bank kept its main interest rate the same, between 0 and 0.25%, its level since the beginning of the pandemic.
The move represents a curveball as initially most Fed officials thought that current rates would remain in place until 2024 at the earliest.
During a press conference on Wednesday, chair of the Fed Jeff Powell provided an optimistic outlook around the economic, specifically regarding employment, Covid vaccinations and the easing of lockdown restrictions.
“There’s every reason to think that we’ll be in a labour market with very attractive numbers, with low unemployment, high participation and rising wages across the spectrum,” Powell said.
Commenting on the Fed meeting and the surprising ‘dot plot’, Rupert Thompson, Chief Investment Officer at Kingswood, said: “The Fed meeting caught the markets somewhat on the hop with the infamous Fed ‘dot plot’ the source of the surprise. A majority of the FOMC are now forecasting two rate hikes in 2023 rather than none as before. The market had already been pricing in two rate hikes in 2023, so in one sense the Fed has merely moved into line with the market. Fed Chair Powell also emphasised that the forecasts in the dot plot should be taken with a big grain of salt. Still, no-one had really expected such a large shift in voting yesterday.”
“The reason for the shift in view is clearly the recent upturn in inflation, which has surprised the Fed by its size, and increased confidence in the rebound in growth. The Fed has raised its forecast for core inflation this year to 3.0% from 2.1% but has stuck to its guns that the rise should prove temporary. It continues to forecast inflation falling back to 2.1% in 2022.”
“Meanwhile, the start of QE tapering (the slowing of QE purchases) has moved a bit closer, at least in one sense. The Fed is now saying that it is talking about talking about tapering. So, an announcement of the Fed’s tapering plans looks likely over the summer with a start late this year or early next.”
“The market reaction saw 10-year US Treasury yields rise 7bps yesterday to 1.57%, US equities drop 0.5% and the dollar rise 0.7%. European equities have opened this morning down no more than 0.25% or so. So the equity moves are relatively small and 10-year yields remain some 20bps below their end-March high.”
European markets remained relatively calm on Thursday morning despite the Federal Reserve saying that the first interest rate rise could come in 2023.
The FTSE 100 is up by 0.52%, or 37 points, to 7,147.68, as investors digest the Fed’s hawkish outlook.
Across the eurozone, Frankfurt’s DAX 30 index fell 0.2% and the Paris CAC 40 was down by 0.3% in response to the Fed’s curveball.