Federal Reserve Officials Raise 2021 Core Inflation Projection to 3%

Fed officials see inflation rising more rapidly than they did in March, but their median expectation is still for interest rates to stay close to zero at least through 2023, based on the “Summary of Economic Projections” (SEP) released Wednesday. 

“Inflation has risen, largely reflecting transitory factors,” Fed officials said in a statement released at the conclusion of their two-day, closed-door meeting.

The Federal Open Market Committee (FOMC), the U.S. central bank’s monetary policy panel, will keep the target rate for federal funds in a range of 0% to 0.25%, according to the statement. The Fed plans to keep buying $80 billion of U.S. Treasury bonds and $40 billion of agency mortgage-backed securities every month.

According to the summary of economic projections:

• Federal officials’ median expectation for growth this year in gross domestic product jumped to 7% from 6.5% in March, when they last disclosed projections.
• The unemployment rate is seen at 4.5% this year, the same as was projected in March.
• Prices for core personal consumption expenditures, the Fed's preferred inflation measure, could rise 3% this year, compared with a March projection of 2.2%.
• The median projection is now for two interest rates by the end of 2023, though seven officials now see an initial rate increase as soon as next year. At the March meeting, only four Fed officials were expecting a liftoff that soon. (Not all Fed officials who plot dots are FOMC voting members, which means that the dots are a projection not a forecast).

At 2:30 pm ET, Fed Chair Jay Powell is expected to host a press conference, where he might discuss whether policymakers are starting to consider when to taper their asset purchases.

Since current inflation headline numbers in the U.S. are being driven by bottlenecks in the global supply chain as some of the richest countries come out of the pandemic the Fed doesn’t feel pressure to taper in response to inflation numbers, said Steven Kelly, a research associate at the Yale Program on Financial Stability, an initiative focused on understanding financial crises.

Wall Street economists and investors have ratcheted up speculation that rising inflation might force the Fed to taper its bond purchases – a form of monetary stimulus known as “quantitative easing,” or QE, that was developed after the 2008 financial crisis. The purchases have swollen the Fed’s balance sheet, which recently topped $8 trillion for the first time in the central bank’s 108-year history. 

“I’m sure there’s a series of academic papers that have set out that QE’s effect on inflation is 10 basis points or 50 basis points or whatever, so we know the direction is positive and that absent QE inflation will never be lower than vice versa,” Kelly said. “But it’s certainly not the potent tool that’s going to cause 5% inflation.”

Inflation will become a more structural threat and no longer a transitory threat when the U.S. gets back to full employment, Kelly added. 

“They don’t want lumber and rental cars being the reason they end up hiking rates,” Kelly said. “They’ve got evidence now that it takes a lot of employment for inflation to react, so they’re going to take that employment they feel like they can get for free without a structural impact to inflation.”