over 2 years ago • 1 min
While the Federal Reserve (Fed) made no changes to its headline interest rate or quantitative easing program on Wednesday, policymakers did signal that they expect to act sooner to head off inflation – spooking investors who’ve come to rely on support from the US central bank.
The Fed’s so-called dot plot charts where officials think US interest rates will be at various points in future. Each dot represents a policymaker’s forecast. As you can see above, the median forecast now indicates the Fed will raise rates by half a percentage point by the end of 2023. As recently as March, they’d forecast rates staying close to zero until 2024 at the earliest.
Markets quickly priced in the potential for US interest rates to rise sooner than previously expected, with stocks, bonds, and gold declining and the dollar rallying on Wednesday. The Fed effectively sets the return on short-term US government bonds – considered a “risk free” investment – so the prices of all other assets are incredibly sensitive to any changes in Fed policy.
Investors will continue to watch US inflation and unemployment data closely for signs of whether the Fed will have to increase interest rates and remove stimulus even faster than these new forecasts indicate.
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