Fed Dramatically Hikes Inflation Projection In Much-Awaited Meeting, Will Not Taper Stimulus

The Federal Reserve hiked its inflation expectations while not backing down from aggressive monetary stimulus.

The central bank insisted during its much-anticipated June meeting that inflation is “transitory” in nature as the United States emerges from COVID-19 and the lockdown-induced recession. Although the Federal Open Market Committee intends to aim for stable inflation rates in the long term, it increased inflation projections for 2021 to 3.4% — an entire percentage point higher than its March forecast.

The Fed’s statement reads:

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. 

Meanwhile, the Fed will continue promoting a near-zero interest rate and purchasing Treasury bonds:

The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.

Citing the United States’ successful distribution of COVID-19 vaccines, the Fed substantially upgraded expectations for American real GDP growth from 6.5% to 7% in 2021. It made no changes to its forecast of a 4.5% near-term unemployment rate.

The Fed will also extend its “temporary U.S. dollar liquidity swap lines with nine central banks through December 31, 2021” in order to promote the “supply of credit to households and businesses, both domestically and abroad.”

As the economy recovers, the United States is observing its highest rise in inflation since the Great Recession. While the Consumer Price Index — a measure of price levels for household goods — saw a 5% year-over-year increase, the Producer Price Index — a metric that tracks business’ purchasing costs — reached a 6.6% year-over-year increase.

A recent poll revealed that American voters across party lines believe that President Biden is responsible for higher inflation.

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