Fed Raises Growth Estimates, Keeps Easy Money Policy

Waitress with face mask serving family with children outdoors in summer on terrace restaurant
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The Federal Reserve recommitted to easy money and low interest rates through 2023 in a unanimous decision to keep its policy unchanged.

Based on stronger economic data, such as in jobs and household spending projections, the Fed’s Federal Open Market Committee (FOMC) raised its real GDP forecast for the year to 6.5% from its December outlook of 4.2% and lowered its expected unemployment rate to 4.5% from 5%. It also raised its core PCE inflation outlook to 2.2% from 1.8%, which is still in the Fed’s comfort zone of “inflation moderately above 2 percent.”

Key Takeaways

  • The Fed kept monetary policy, including interest rates, unchanged. 
  • The FOMC acknowledged economic improvement but said more work needs to be seen in unemployment and some sectors of the economy.
  • Based on stronger economic data, the FOMC raised its economic outlook but still sees inflation within its comfort zone.
  • Rates are expected to remain unchanged through 2023, but more members moved up their forecast for a rate hike next year.

“Following a moderation in the pace of the recovery, indicators of economic activity and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak,” the FOMC said in a statement. The Federal Reserve also said it will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities (MBS) by at least $40 billion per month. 

After the pandemic hit last year, the Federal Reserve moved quickly to shore up the economy by slashing interest rates to near zero and flooding the economy with cash. Since then, the recovery has seen its ups and downs, including a downturn last winter when COVID-19 infections increased and restrictions renewed. But with the rollout of vaccines and another stimulus bill, there have been signs of an economic resurgence, igniting talk of inflation and Fed rate hikes arriving sooner rather than later.

Notably, four members of the committee projected at least one rate increase in 2022, up from only one person in December, and seven members projected at least one rate hike in 2023 compared to five members last time.

At a press conference following the statement, Powell said the Fed was not backing off of its easy money policies until they saw actual progress rather than forecasts, and cautioned against reading too much into the “dot plot” that shows the forecasts of individual FOMC members. 

"It isn't meant to actually pin down a time when we might or might not lift off,” Powell said. “Chances are that the economy in that time and place will be very different from the one we think it’ll be." The dots are “not meant to actually be a promise or even a prediction of when the committee will act. That will be very much dependent on economic outcomes, which are highly uncertain,” he said.

Powell predicted that reopening the economy, especially the hard-hit hospitality sector, would cause inflation to increase modestly, but that it would wear off quickly. 

“You can only go out to dinner once per night, but a lot of people can go out to dinner,” Powell said. “It will turn out to be a one-time sort of bulge in prices, but it won’t change inflation going forward.” 

Separately, the Fed moved to support short-term interest rates, which have been falling perilously close to zero—and even negative territory—due in part to the flush of stimulus cash in the system.