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Federal Reserve Hints at Two 2023 Rate Hikes, Boosts Growth, Inflation Forecasts

Changes in growth and inflation forecasts suggest the potential for two rates hikes in 2023, a move that could trigger a near-term change in the Fed's monthly bond purchases.

The Federal Reserve made no changes to record low interest rates Wednesday but hinted at two rate hikes in 2023 as it acknowledged progress in labor markets and boosted it near-term targets for growth and inflation.

Fed Chairman Jerome Powell also said the pace of the central bank's monthly bond purchases would remain unchanged at $120 billion and pledged to hold its accommodative policies in place until the job market has reached full employment and inflation exceeds its target "for some time" even as it acknowledged that progress in COVID vaccinations, which have inoculated around 145 million Americans, has led to improvements in labor markets and broader economic growth.

The number of Fed governors that expect near-term rate hikes went from four to seven, while 13 seem them for the following year, essentially translating into two 2023 rate hikes based on growth and inflation projections from the 18 FOMC members, otherwise known as the "dot plot".

"In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook," the Fed statement said. "The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals."

"The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments," the statement added.

U.S. stocks turned lower following the Fed statement, which will be followed by a press conference at 2:30 PM Eastern time, with the Dow Jones Industrial Average falling 325 points and the S&P 500 sliding 33 points.

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Benchmark 10-year Treasury note yields, meanwhile, rose 7 basis points to 1.562% while the dollar index rose 0.55% to trade at 91.017 against a basket of its global currency peers.

U.S. consumer price inflation increased at the fastest pace in more than a decade again last month with headline CPI for the month of May rising 5% from last year, and 0.6% when compared to the April reading, with both tallies coming in well ahead of Wall Street forecasts. 

So-called core inflation, which strips-out volatile components such as food and energy prices, rose 0.7% on the month and 3.8% on the year, the report noted, the highest since 1992.

The Fed's preferred measure of U.S. inflation surged the most in nearly three decades over the month of April, as well, as consumer spending got a boost from President Joe Biden's $1.9 trillion American Rescue Plan and supply-chain bottlenecks added to price increases.

"The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run," the Fed statement said. "With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2% over time and longer‑term inflation expectations remain well anchored at 2%."

"The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved," it added.