The Federal Reserve is keeping interest rates steady at near-zero for now. The U.S. central bank also raised its projection for inflation, reflecting rising prices for everything from groceries to gas.
The Federal Reserve expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with its assessments of maximum employment. Inflation has risen to two percent and is on track to moderately exceed two percent for some time, according to the Federal Open Market Committee (FOMC) statement.
Meanwhile, the policymaker expects two interest rate hikes by the end of 2023, up from zero in the last meeting.
The Fed will also continue to increase its holdings of Treasury securities by at least $80 billion per month and agency mortgage‑backed securities by at least $40 billion per month until substantial progress is made toward the committee's maximum employment and price stability goals, the statement said.
The Fed believes the U.S. economy will more quickly approach its dual mandate of inflation averaging two percent and maximum sustainable employment, so Jerome Powell expects to normalize the policy more quickly than before, said Matt Weller, global head of market research at Forex.com.
"The early market reaction showed that traders were caught off guard by the hawkish shift in the Fed's interest rate projections, with major stock indices selling off, the U.S. dollar catching a bid and gold shedding a quick 25 points. Powell's press conference is doing little to dissuade the market of its initial hawkish interpretation of the statement and economic projections," Weller said.
"Perhaps the most interesting move is taking place in the bond market, where yields on the two-year Treasury bond have ticked up four basis points (bps) to 0.20 percent while the yield on the benchmark 10-year Treasury bond surged over 10 bps to 1.58 percent," Weller said.
In the future, the Fed needs to further discuss and clarify the timing of each step, as the timing will be affected by the recovery process and the uncertainty of the global situation. We believe that under the benchmark, the scale of bond purchases will be reduced in the fourth quarter of 2021, said Cheng Shi, chief economist at ICBC International.
"Balance sheet reduction and interest rate hikes will occur in 2022," Cheng said.