Fed Predicts Economic Growth Surge in 2021, but No Rate Hike

The central bank says the future of the U.S. economy looks much brighter and predicts the unemployment rate to drop off as more people get vaccinated and relief programs deliver much-needed aid.

The Federal Reserve building in Washington. (AP Photo/Patrick Semansky, File)

(CN) — Policymakers with the Federal Reserve are predicting a significant economic upswing and a falling jobless rate in 2021 as the U.S. feels the impacts of increased Covid-19 vaccination and financial relief efforts.  

In its quarterly summary of economic projections released Wednesday, the Fed predicts the unemployment rate to drop to 4.5% by the end of the year, and down to 3.9% by the end of 2022. It currently stands at 6.2%.

“The Covid-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Following a moderation in the pace of the recovery, indicators of economic activity and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak,” the central bank’s Federal Open Market Committee said in a statement

Participants of a two-day FOMC meeting on Tuesday and Wednesday laid out projections of the most likely outcomes for real gross domestic product growth, unemployment and inflation in the U.S. for each year from 2021 to 2023 and “over the longer run.”

The Fed members expect the GDP to grow by about 6.5% this year, which is the fastest growth rate since the 1980s.

The March projections by the central bank are the first to account for the $1.9 trillion stimulus package passed last week to mitigate the economic fallout of the coronavirus pandemic. 

With a much more optimistic outlook than the last summary released in December, Wednesday’s report is also the first set of projections to include the $900 billion relief plan passed late last year and the uptick in access to vaccines. 

“The path of the economy will depend significantly on the course of the virus, including progress on vaccinations. The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook,” the committee said in its statement.

The central bank decided to keep its key interest rate at nearly 0% Wednesday, signaling it won’t raise the rate until 2023 despite concerns from some economists about high inflation.

According to the report, inflation is expected to reach 2.4% by the end of the year, compared with the December prediction of 1.8%. Inflation has consistently stayed below the Federal Reserve’s 2% annual target, going back to the decade-long streak of economic growth prior to the pandemic.

The Fed also stuck with its plan to buy at least $120 billion in Treasury bonds and agency mortgage-backed securities each month.

However, it warned that its projections can change with economic circumstances.

“Considerable uncertainty attends these projections, however. The economic and statistical models and relationships used to help produce economic forecasts are necessarily imperfect descriptions of the real world, and the future path of the economy can be affected by myriad unforeseen developments and events,” the report states.

It added, “Thus, in setting the stance of monetary policy, participants consider not only what appears to be the most likely economic outcome as embodied in their projections, but also the range of alternative possibilities, the likelihood of their occurring, and the potential costs to the economy should they occur.”

Federal Reserve Chairman Jerome Powell said on Wednesday that markets need not brace themselves for a rate hike anytime soon.

“The state of the economy in two or three years is highly uncertain and I wouldn’t want to focus too much on the exact timing of a potential rate increase that far into the future,” Powell told reporters.

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