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Federal Reserve Keeps Key Rates At Record Lows, Boosts GDP Forecast

The Fed said it sees stronger growth and faster inflation, but notes a soft labor market will likely mean no rate hikes until at least 2023.

The Federal Reserve pledged to maintain its loose monetary policy for at least the two years, even as it boosted its GDP forecast and said inflation would likely rise past 2% in the coming months. 

In a statement that followed the central bank's decision to leave its benchmark Fed Funds rate in a record low range of 0% to 0.25%, the Fed added it would continue to increase the pace of its monthly bond purchases to a total of $140 billion a month, and use "all of its available tools" until "substantial further progress" has been made in terms of its twin mandate of price stability and full employment. 

The Fed said inflation would be at or above 2% fall all of this year, and lifted its average GDP forecast to 6.2%, from a prior estimate of 4.5%, adding that unemployment will fall to 4.5% by the end of the year. 

Four Fed officials now see rate hikes in 2022, up from one at the Fed's last meeting in December, while the median for the next Fed hike remains in early 2023.

"Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses," the statement read. "The path of the economy will depend significantly on the course of the virus, including progress on vaccinations."

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"The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook," the statement added.

U.S. stocks extended earlier gains immediately following the Fed statement, with the Dow Jones Industrial Average up 205 points on the session and the S&P 500 and the Nasdaq turning into positive territory. 

Benchmark 10-year Treasury note yields, which hit a 14-month high of 1.671% earlier in the session, slipped to 1.65% while the dollar index was marked 0.3% lower at 91.59 against a basket of its global currency peers.

Interest rate traders are also boosting their forecasts for near-term inflation, taking the so-called breakeven rate between five-year Treasury bonds and five-year inflation protected securities, a key market gauge for consumer price increases, was marked at 2.6% Wednesday, the highest since at least 2008 and firmly ahead of the Fed's 2% inflation target.

In fact, global fund managers are more worried about faster inflation than they are about the pace of coronavirus infections for the first time in more than a year, Bank of America's benchmark survey indicated Tuesday, noting that a 10-year yield of 2% could spark a 10% correction in the S&P 500.