Fed Keeps Rates, Says Inflation ‘Largely Reflects Transitory Factors’

The US Federal Reserve (Fed) decided to keep the target range for the federal funds rate at 0 to 0.25%, increased GDP growth and inflation forecasts for this year, sending a hawkish signal.

Meanwhile, their quarterly projections showed that 13 of 18 officials favored at least one rate increase by the end of 2023, versus seven officials in March. 11 officials saw at least two hikes by the end of 2023, while seven saw a move as early as 2022, up from four.

However, Chairman Jerome Powell stressed that discussions about raising rates would be “highly premature.”

Bitcoin (BTC) moved higher following the announcement, climbing from around USD 39,037 to over USD 39,500, before correcting lower. At 06:46 UTC, BTC trades at USD 38,594 and is down by more than 6% in a day, trimming its weekly gains to less than 15%. Meanwhile, the US dollar rose, stocks declined and yields on 10-year Treasuries jumped following the news.

The Fed increased their GDP growth projections to 7% this year, compared with 6.5% in March, while the core PCE (personal consumption expenditures) inflation is now estimated to hit 3% this year, compared with 2.2% estimated in March. Meanwhile, inflation in 2022 and 2023 is estimated to drop to 2.1%. The unemployment rate for this year is estimated to reach 4.5%, or the same as in March.

“Inflation has risen, largely reflecting transitory factors,” the Fed said.

However, speaking at a briefing, Powell added that inflation could turn out to be higher and more persistent than the Fed expects.

“As the reopening continues, shifts in demand can be large and rapid, and bottlenecks, hiring difficulties, and other constraints could continue to limit how quickly supply can adjust,” he said.

As reported, the US economy’s rebound from the pandemic is driving the biggest surge in inflation in nearly 13 years, with consumer prices rising in May by 5% from a year ago. The core-price index, which excludes the often-volatile categories of food and energy, jumped 3.8% in May from the year before—the largest increase for that reading since June 1992.

“Progress on vaccinations has reduced the spread of COVID-19 in the United States. Amid this progress and strong policy support, indicators of economic activity and employment have strengthened,” the central bank said today, adding that the sectors most adversely affected by the pandemic remain weak but have shown improvement.

According to them, the path of the economy will depend significantly on the course of the virus.

“Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain,” the Fed said.

Also, the Fed added that it will continue to increase its holdings of Treasury securities by at least USD 80bn per month and of agency mortgage‑backed securities by at least USD 40bn per month “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”

“It’s a hawkish surprise. We are looking at a Fed that seems positively surprised by the speed of vaccinations and the ongoing withdrawal of social-distancing measures. It’s almost like the Fed is carried away by the ongoing reopening euphoria,” Thomas Costerg, senior US economist at Pictet Wealth Management, told Bloomberg.

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Watch Jerome Powell speaking at the briefing and answering questions:

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Prior to the event, Mati Greenspan, Founder of Quantum Economics, opined that “it would seem that inaction from central bank officials could very well send bitcoin and other cryptocurrencies straight to the moon.” Meanwhile, hedge fund billionaire Paul Tudor Jones also said that if the Fed continues to talk down inflation and fails to take action, it will be “a green light to bet heavily on every inflation trade.”

Greenspan further noted that Jones “teas[ed] out” the (in)famous WallStreetBets subreddit group by “hinting that commodities would be a killer investment should the Fed allow inflation to run rampant.”

Learn more: US Fed Inactivity May Lead Bitcoin to Moon, But a Negative Impact is Possible

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