The uptick in US inflation won't last, the Federal Reserve's policy setting committee said Wednesday as it ended its latest meeting, though a majority of the bank's top officials now believe interest rates may rise in 2023.
The central bank acknowledged that widespread vaccinations have allowed the United States to rebound faster than previously expected from the Covid-19 pandemic downturn, but in its statement after the meeting's conclusion, the Federal Open Market Committee (FOMC) acknowledged "risks to the economic outlook remain."
Fed officials appear to have grown more hawkish since their last meeting in April, with 11 of the 18 committee members expecting at least two rate hikes in 2023 and seven expecting one as soon as next year, according to updated quarterly economic projections released after the discussions closed.
Markets and analysts have been closely watching FOMC meetings in recent months as they weigh fears that the Fed's stance on rising prices is too passive, leading to an upward price spiral that would force the Fed to aggressively raise rates -- and crush economic growth.
The FOMC again tried to ease those worries, stressing they would not act to remove stimulus measures implemented at the start of the pandemic until progress is made on reducing unemployment and keeping inflation above their two percent goal.
The central bank will alter its policy if it sees signs inflation moved "materially and persistently beyond levels consistent with our goal," Fed Chair Jerome Powell said.
But since inflation has lagged the bank's target for over a decade, and unemployment remains at 5.8 percent, achieving "substantial further progress is still a ways off," he said in his press conference following the meeting.
The median forecast for annual inflation this year increased to 3.4 percent from the FOMC's previous 2.4 percent in March, but they see the rate slowing to 2.1 percent in 2022, according to the projections.
Committee members also boosted their growth outlook to seven percent from 6.5 percent.
US Federal Reserve Chair Jerome Powell said the economic picture is favorable although some of the data may not be as good as it looks Photo: AFP / Eric BARADAT
However Powell stressed that those projections "do not represent a committee decision or plan."
Asked about the rise in the consumer price index to five percent for the 12 months ended in May, Powell attributed that to "a perfect storm of strong demand and limited supply" for things like used cars, and said, "We do think it makes sense that that would stop and in fact it would reverse over time."
However, "we are not sure" about the timeframe, he said.
He warned that the "recovery is incomplete" and improvement has been "uneven," with employment in hard-hit sectors well below pre-pandemic levels.
The FOMC also said it will continue buying $120 billion a month in bonds, thereby providing a steady flow of liquidity to the economy.
Powell said the committee is not focused on interest rates but has started discussions on when to taper the pace of bond purchases as its first move towards ending the pandemic measures.
He said the Fed will give plenty of notice before making any major changes.
"These measures along with our strong guidance on interest rates and on our balance sheet will ensure that monetary policy will continue to deliver powerful support to the economy until the recovery is complete," Powell said.
