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Fed moves closer to interest rate hike due to rising inflation

17 June 2021
2 min.
Fed moves closer to interest rate hike due to rising inflation

Interest rate hike

At the end of the meeting, the Fed brought the timing of the interest rate hike closer to 2023 from 2024. The US central bank also raised its forecast for overall inflation to 3.4%. The stock market was not prepared for this, reacting with a sharp decline.

The outcome of the two-day June meetings of Federal Reserve (Fed) officials on Wednesday was a significant increase in this year's inflation forecast and the looming timing of the next interest rate hike.

The S&P 500 Index was down 0.54% at the close of trading, down another 0.46% in after-hours trading, the Nasdaq Composite was down 0.24%, the Nasdaq 100 was down 0.34% and 0.64% after-hours trading, and the Dow Jones closed down 0.77%, continuing a 0.44% decline in after-hours trading.

On balance the Fed kept the current interest rates at 0.25%- 0% but indicated that a rate increase could take place as early as 2023, after it had announced in March that there would be no increase until at least 2024.

Furthermore, the so-called dot plot of expectations of individual Fed members indicates as many as two rate hikes in 2023.

This decision stems from the central bank raising its forecast for general inflation by a full percentage point from the forecast of 2.4% in March to 3.4% this year, which represents the biggest increase in consumer prices since 2008.

This jump in inflation is having a negative effect on financial markets, but the Fed repeated its statements that inflationary pressures are "temporary".

At the end of the meetings, the Fed also confirmed that it will start discussions to reduce the quantitative easing programme.

Currently, the US central bank is buying $80bn in treasuries and $40bn in mortgage-backed securities each month. However, as the US economy recovers, the Fed could end this additional stimulus measure.

Fed Chairman Jerome Powell said that he thought it would be appropriate to start discussing the start of a stimulus cut at the next meetings if progress in the economic recovery continues. However, no timing or pace was announced.

The central bank raised its forecast for US GDP in 2021 to 7% from 6.5% previously. Officials noted that progress towards the Fed's employment target is proceeding somewhat faster than expected.

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