A ‘humble’ Fed ramps up inflation forecast as prices jump

The rate-hike prediction sent stocks tumbling and bond yields rising as investors grappled with the possibility that the Fed would soon begin to pull back on its massive support for the economy that’s been in place since the pandemic began, when it pledged trillions of dollars to keep financial markets from freezing up. The Fed today gave no indication that it intended to remove that support yet.

Fed Chair Jerome Powell said the central bank still expects rising inflation to subside in the coming months but underscored that he will be watching the data to see if that’s wrong.

Despite concern among some investors and economists that price spikes in the past couple of months could derail the recovery, Powell told reporters that the data seems to support the Fed’s view that prices are being pushed up by temporary mismatches in the economy as consumer demand surges faster than producers can keep up. The Fed expects those disruptions to slowly work themselves out as the economy more fully reopens.

“But we don’t in any way dismiss the chance that it can work out that this goes on longer than expected,” Powell said. “There’s a lot to be humble about. We’re very much attuned to the risks.”

Both the Fed and the Biden administration have acted to avoid the type of sluggish recovery that took place after the Great Recession, when Congress shifted quickly to rein in government spending and the Fed began raising interest rates before inflation showed notable signs of picking up. Instead, they’re aiming for high-powered growth this year that will catapult the economy back to where it was before the pandemic and put it on a path to continue improving.

While Fed officials raised their inflation forecast in the wake of higher-than-expected price readings, for now they don’t expect to have to raise borrowing costs.

Along with the Fed’s more optimistic overall growth expectations for the economy, the policymakers penciled in two rate hikes for 2023, though Powell emphasized that it was difficult to forecast such things with any certainty.

The Fed’s rate-setting committee in its statement did not give any hints as to when it might start slowing its bond purchases, the first step it would take to pull back its economic support.