Interest Rate in USA

USA - Interest Rate

Fed keeps rates at effective floor in June; projects earlier rate hike

At its meeting on 15–16 June, the Federal Open Market Committee (FOMC) decided to hold the target range for the federal funds rate at its effective floor of 0.00%–0.25%. Moreover, the Fed reaffirmed its commitment to using its full range of powers to support the economic recovery at its current pace. The decision was widely anticipated by market analysts.

The Fed kept the target range unchanged due to the economic fallout caused by the ongoing public health crisis. Despite economic activity continuing to gain momentum in recent months amid ample fiscal stimulus, employment is expected to remain below its pre-pandemic levels in the short term and the sectors most affected by Covid-19-related restrictions remain hampered, albeit they are showing some signs of improvement as containment measures continue to loosen. Moreover, the recent jump in inflation, which came in notably above the Fed’s 2.0% target rate in April and May, seems to have been predominately driven by transitory factors. Furthermore, in order to ensure sufficient liquidity for households and businesses and the effective transmission of monetary stimulus to broader financial conditions, the Fed reaffirmed its commitment to increase its purchases of Treasury securities, and agency residential and commercial mortgage-backed securities, at least at the current pace of USD 80 billion per month and USD 40 billion per month, respectively. Additionally, the Bank will continue to offer large-scale overnight and term repurchase agreement operations.



Looking ahead, the Fed reaffirmed it will likely keep the target policy rate at its current level 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”. However, while the Committee maintained its unemployment forecast for this year at 4.5%, it raised its median GDP growth projection for 2021 to 7.5% from its previous forecast of 6.5%. Notably, the Fed also moved forward its median projection for hiking rates, which markets viewed as a hawkish move. Currently, all of our panelists see the federal funds target rate ending this year at 0.25% and the majority see the first hike in 2023.

Commenting on June’s meeting, James Orlando, senior economist at TD Economics, noted:

“The median of the FOMC [changed] its view, moving forward the first rate hike to 2023. Previously, only a minority of the Fed thought this would happen. The shift to a more hawkish Fed is underway. We think there is more to come. While 13 members think the first hike will happen in 2023, 7 members see it happening in 2022. With the economic recovery set to continue at a torrid pace, more Fed members are likely to continue to signal an earlier start to the rate hiking cycle. This should be the impetus for higher bond yields going forward.” 

The next FOMC meeting is scheduled for 27–28 July.

FocusEconomics Consensus Forecast panelists project the federal funds target rate to end 2021 at 0.25% and 2022 at 0.29%.