Fed Could Pencil In Earlier Rate Increase at Meeting

Fed officials in March saw consumer prices rising 2.4% in the fourth quarter of 2021 from a year earlier. That pace, they said, would be consistent with their goal of 2% average annual inflation over the long run.

Inflation has soared since then, as the economy has rebounded much faster than expected, businesses have struggled to hire workers, and shortages of key materials have wreaked havoc on supply chains.

The Labor Department’s consumer-price index jumped 5% in May from a year earlier, following a 4.2% increase in the 12 months through April.

For inflation to meet officials’ March forecasts, prices would have to not only stop rising but fall over the rest of the year. Barclays Bank PLC now expects annual inflation, measured by the Fed’s preferred gauge, to hit 3.6% in the fourth quarter—nearly double the central bank’s target.

Fed officials’ individual March projections, charted in their so-called dot-plot, showed all 18 policy makers expected to leave interest rates unchanged through this year. Four expected to start lifting rates next year, and seven projected that rates would be higher by the end of 2023.

The new dot-plot coming Wednesday could show more individuals expect to raise rates in 2022 or 2023, analysts say. A June survey of 127 market participants by MacroPolicy Perspectives LLC showed 68% of respondents expecting at least one rate increase in 2023.

JPMorgan Chase chief U.S. economist Michael Feroli said he now expects the dot-plot to show a median expectation of a rate increase in 2023.

“We are also bringing forward our expectations for liftoff to late 2023,” he said in a note Friday.

Signs of surging inflation have emerged faster than the Fed anticipated as recently as its April policy meeting. Fed officials haven’t publicly commented on the May inflation report because it was released Thursday during their self-imposed blackout period, when they refrain from speaking publicly on monetary policy ahead of their meeting.

Before the blackout period began on June 5, officials repeatedly said they expected this year’s inflation surge to prove transitory, but they also cautioned that they will raise rates if needed to keep inflation under control.

“Should inflation move materially and persistently above 2 percent, we have the tools and experience to gently guide inflation back down to target. And no one should doubt our commitment to do so,” Fed governor Lael Brainard said in a speech June 1.

The Fed in August adopted a new approach to setting interest rates by dropping its longstanding practice of raising them pre-emptively to prevent inflation from exceeding its 2% target. Instead, it wants inflation to average 2% over time, a more flexible objective. Since August, the Fed has said it would aim for inflation to run moderately above that level for a while to make up for many years of shortfalls.

Policy makers have said since December that they wouldn’t raise rates until inflation hit 2% and is forecast to exceed that level for some time and the economy has achieved maximum employment.

The labor market’s progress this year has been slower than officials had hoped. In recent weeks, some Fed officials have indicated they may lower the number of job gains required to reach maximum employment, because of the wave of retirements since the pandemic began.

Fed officials at their meeting this week are also likely to begin discussing when and how to start reducing the central bank’s monthly purchases of Treasury and mortgage bonds. When they have wound down previous bond-purchase programs, they let the so-called tapering process run its course before raising interest rates. Many economists expect tapering to begin around the end of this year or in early 2022.

In a statement after their April policy meeting, Fed officials said the economy needed to make “substantial further progress” toward maximum employment and sustained 2% inflation before they would begin reducing bond purchases.

Fed officials’ updated forecasts are also likely to show they expect the economy to grow faster this year than the 6.5% they projected in March. Goldman Sachs & Co. LLC economists estimate growth of 7.7% this year, helping to push inflation to 3.5% in the fourth quarter from a year earlier.

Write to Paul Kiernan at [email protected]