Federal Reserve Officials Raise 2021 Inflation Projection, Powell Addresses Asset Purchases

This was the "talking about talking about" tapering meeting, U.S. Federal Reserve Chair Jerome Powell said in a press conference Wednesday.

“I now suggest that we retire that term which ... has served its purpose well, I think,” Powell said. 

He spoke after Fed officials raised their inflation expectations and moved the year for interest rates to rise from 2024 to 2023, based on the "Summary of Economic Projections" (SEP) released Wednesday. For the time being, the Fed said it would keep interest rates near 0% and keep buying $120 billion in bonds a month.

The chair wouldn't make any commitments on timing of when the central bank would pare its bond purchases, but the markets now know to expect more conversations about it in the future.

While the economy has "made progress" it has not yet made "substantial further progress."

"The economic conditions in the committee's forward guidance will be met somewhat sooner than previously expected," Powell said.

The chair also said that there would be a "a very strong labor market" coming quickly as "supply and demand meet" in the coming months. On the other side of the economic recovery, inflation "could be actually quite low," he added.

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

Prices for bitcoin, seen by some traders as a hedge against inflation but also often characterized as a risky asset whose value might drop if monetary policy gets tightened, has slipped 1.6% to about $38,500 since the 2 p.m. ET announcement.

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:

Because 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.”  

UPDATE (JUNE 16, 18:44 UTC): Core PCE inflation numbers replaced with total PCE inflation numbers.

UPDATE (JUNE 16, 20:10 UTC): Adds comments from Federal Reserve Chair Jerome Powell.