Fed expects growth surge, inflation jump in 2021 but no rate hike

March 18, 2021, 06.14 AM | Source: Reuters
Fed expects growth surge, inflation jump in 2021 but no rate hike

ILUSTRASI. Federal Reserve Board Chairman Jerome Powell


THE FED - WASHINGTON. The U.S. economy is heading for its strongest growth in nearly 40 years, the Federal Reserve said on Wednesday, and central bank policymakers are pledging to keep their foot on the gas despite an expected surge of inflation.

"Strong data are ahead of us," a confident Fed Chair Jerome Powell said after a two-day policy meeting, ticking off the list of forces Fed officials expect will produce 6.5% GDP growth this year - from massive federal fiscal stimulus to optimism around the success of coronavirus vaccines.

"The (stimulus) checks are going out ... COVID cases are coming down. Vaccination is moving quickly," Powell said, marking a moment in which a body of top U.S. economic officials expect growth in the United States to rival that of China this year, not to mention surging quickly beyond that of Europe and Japan.

Fed officials, in fact, expect economic growth to remain above trend for at least two years to come, at 3.3% in 2022 and 2.2% in 2023, compared to estimated long-term potential growth of just 1.8%.

While inflation is expected to jump to 2.4% this year, above the central bank's 2% target, Powell said that is viewed as a temporary surge that will not change the Fed's pledge to keep its benchmark overnight interest rate near zero as part of an effort to ensure the economic wounds from the pandemic are fully healed.

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Opinions among the Fed's 18 current policymakers did shift somewhat, with four now expecting rates may need to rise next year and seven seeing a rate increase in 2023.

But in overlooking the expected jump in inflation this year without a policy response, the Fed held true to its new framework and a pledge not to overreact at the first hint of rising prices, a reaction that has in the past been felt to nip off periods of growth before workers felt the full benefits.

Fed officials now expect inflation to remain tame even as the unemployment rate drops, a calculated gamble under their new approach that emphasizes employment gains and downplays inflation risks.

Powell noted the "strong bulk" of the policy-setting Federal Open Market Committee anticipates no interest rate increase until at least 2024, and he added that it was even too soon to talk about scaling back the $120 billion of Treasury bonds and mortgage-backed securities the Fed is buying each month to further prop up the economy.

The FOMC's policy statement, which kept the benchmark overnight interest rate in a target range of 0-0.25%, was unanimous.

"We are committed to giving the economy the support it needs to return as quickly as possible to a state of maximum employment," Powell said in a briefing after the Fed released its new economic projections and latest policy statement.

"We are not actually done yet. We are clearly on a good path. But we are not done, and I would hate to see us take our eye off the ball ... There are in the range of 10 million people who need to get back to work."

Editor: Anna Suci Perwitasari

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