On Wednesday, the Federal Reserve increased its inflation forecasts for 2021 and said it could raise interest rates as soon as 2023. Inflation is expected to rise to 3.4% this year, more than the Fed’s prior inflation forecast of 2.4% in March. Furthermore, previous Fed projections indicated that the first interest rate rise would not occur until 2024 — is the economy overheating faster than expected?
The Federal Reserve anticipates prices for some goods and services to climb further in the coming months, particularly in businesses with backed-up supply chains. On the other hand, The Fed believes that the labor market will continue to strengthen.
While the central bank is not ready to raise interest rates to combat inflation just yet, Chairman Jerome Powell made it clear that the Fed is monitoring inflation closely. He also said the Fed would be prepared to act swiftly if inflation becomes long-lasting or more widespread than officials currently believe. However, Powell maintained his long-held belief that the increases will only have a transitory impact.
He stated, “The prices that are driving higher inflation are from categories that are being directly affected by the recovery from the pandemic and the reopening of the economy. Prices that have moved up quickly because of the shortages, bottlenecks, and the like, should stop going up. And at some point, they in some cases should actually go down.”
The Fed’s announcement that it will end its record-low interest rate policy sooner than expected weighed down on the markets. The Dow Jones Industrial Average fell 0.8%, and the Nasdaq composite sank 0.2%.
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