The Federal Reserve on Wednesday made no surprising moves following its two-day meeting, keeping benchmark interest rates near zero. It, however, indicated that rate hikes could come sooner than expected.
While officials on the policymaking Federal Open Market Committee (FOMC) didn’t make any policy changes at their meeting this month, they did say the Fed could begin shrinking its stimulus program in November and potentially raise interest rates in 2022.
Fed Chairman, Jerome Powell, said the Fed appears to have achieved more than significant progress on inflation and employment.
Markets shaved some of their gains following the Fed news, with major stock averages still showing strong gains.
The S&P 500 and the Dow Jones Industrial Average snapped their four-day losing streaks. But FedEx had its worst trading day in 18 months after it said a severe labor shortage added $450 million to its costs.
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The dollar eased lower in early European trade Thursday, retreating from a one-month high as traders digested what the Fed’s decision means for future monetary policy. The Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 93.332, slipping from a one-month high of 93.526.
EUR/USD jumped 0.2% to 1.1711, bouncing off a one-month low. USD/JPY rose 0.1% to 109.88, while the risk-sensitive AUD/USD dropped 0.1% to 0.7241, near multi-week lows.
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In England, the GBP/USD rose 0.2% to 1.3654 with traders positioning for a potential surprise at the Bank of England’s latest policy-setting meeting later on Thursday.
Interest rates & inflation
According to the central bank’s dot plot of projections, nine of the 18 FOMC members expect the first interest rate hike next year, up from seven in June’s Fed projections.
While one member expects at least one rate hike by the end of 2023, thirteen members are forecasting two rate hikes through 2023.
There are some changes in the Fed’s economic forecasts as the committee has dialed down its GDP projects for this year.
The central bank now expects real gross domestic product to grow 5.9% in 2021, down from its estimate of 7.0% growth from the June meeting. The Fed raised its GDP projections for 2022 and 2023 to growth of 3.8% and 2.5%, respectively.
Projections also signaled that FOMC members see inflation stronger than June projections. The Fed now sees inflation running to 4.2% this year, above its previous estimate of 3.4%.
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