Federal Reserve policymakers on Wednesday delivered a surprise by signaling two interest rate hikes by the end of 2023. But Fed Chairman Jerome Powell downplayed those forecasts as anything other than speculation.
The forecasts in question concern the “dot plot,” a quarterly map of each Federal Open Market Committee member’s expectations for rates over coming years.
In an updated release Wednesday, the median member now expects two rate hikes by the end of 2023, a noticeable jump from the March projection for no rate hikes through that time horizon.
“The dots are not a great forecaster of future rate moves and it’s just because it’s so highly uncertain,” Powell told reporters after the central bank’s announcement that it was holding interest rates at near zero.
Powell added that dot plots should be taken with a “big grain of salt,” reminding Fed watchers that the central bank will guide policy based on outcomes, not outlooks.
Bond markets jumped after reading the dot plots when they were released at 2 p.m. ET. The U.S. 10-year Treasury yield (^TNX) surged as high as 10 basis points to 1.59%, but fell as Powell talked down the dot plots in his press conference.
“These are 18 different forecasts and I can’t stand here and say what was exactly in all 18 peoples’ minds,” Powell said, reiterating that those forecasts are not the primary discussion in policy meetings.
The dot plots present a challenge for the Fed, which is attempting to guide market participants through an economic bounce-back of unprecedented speed.
"This is an extraordinarily unusual time, and we really don't have a template or any experience in a situation like this,” Powell said. “We have to be humble about our ability to understand the data."
A 'discussion' about possible tapering
The FOMC this week took the first step towards paring back its aggressive money printing policies by kicking off discussions over tapering its asset purchase program.
Since the depths of the pandemic, the Fed has been absorbing about $120 billion each month in U.S. Treasuries and agency mortgage-backed securities. Up until this week, the Fed had insisted that it was not “thinking about thinking about” slowing those purchases.
But Powell said Wednesday the Fed had a “discussion” on possible tapering this week, which may involve defining the vague “substantial further progress” goal that the central bank established in December 2020.
The Fed chairman said whenever the Fed gets ready to taper, policymakers will give market participants “advance notice” before announcing anything.
“Our intention for this process is that it will be orderly, methodical and transparent,” Powell said.
The taper talk comes as inflationary pressures continue to rise.
The new projections show the median member of the committee viewing inflation rising at a faster clip than its last round of forecasts in March, expecting core personal consumption expenditures (the Fed’s preferred measure of inflation) clocking in at 3.0% in 2021 (compared to 2.2% in its March forecast).
But the Fed expects those pressures to alleviate in the following years, with core PCE falling down to 2.1% in 2022.
Powell said he still expects much of the upward pressure on prices to be temporary, owing to supply chain bottlenecks. But he acknowledged the risk of inflation running away.
“Inflation could turn out to be higher and more persistent than we suspect,” reiterating that the central bank has the tools to address that if needed.
The next FOMC meeting will take place July 27 and 28.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.