Fed will raise rates in 2023

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The traditional two-day meeting of the Central Bank of the United States – Federal Reserve System (Fed), which took place from Tuesday 15 June to Wednesday 16 June 2021 in Washington, DC, gave investors an answer to the question regarding a possible interest rates increase in the United States. At this meeting, a key Fed committee, the Federal Open Market Committee (FOMC), decided that interest rates would not be raised until 2023. It also did not rule out the possibility of raising rates twice that year.

Therefore for 2021 and very likely 2022, the FOMC negotiations left the basic interest rate unchanged.  Currently it ranges from 0.00 to 0.25% per year. Based on these facts and due to yesterday’s meeting of US and Russian presidents – Mr. Biden and Mr. Putin – in Geneva, Switzerland, the international foreign exchange – Forex market reacted by strengthening the exchange rate of the US dollar (USD) against other world currencies. On 17 June at 9:39 am CET, according to the US Dollar Currency Index (DXY), which compares the USD with six other major world currencies, the USD was seen at a price level of 91.65 with the current daily strengthening of +0.57%. At the previously mentioned time the global currency pair EUR/USD traded at the mutual exchange rate of US$ 1.194 per EUR, with the current daily decline of the EUR by -0.434% against the USD.

According to the scatter chart, the Fed forecasts at least two increases of interest rates in 2023. Wednesday’s forecast of June 16, 2021 thus showed that 13 members of the FOMC believe that the Fed will raise rates in 2023, and most of them believe that it will increase interest rates at least twice. Only five members of the FOMC still think that the Fed will keep the current interest rates ranging from 0.00 to 0.25% p.a. unchanged until the end of 2023, but seven of the 18 members actually estimate that the Fed will reconsider in the beginning of next year, and possibly will increase rates as early as 2022. In March 2021 four of the 18 FOMC members were looking for a rate increase at some point in 2022, and at the same time, seven members wanted the same in 2023.

Each quarter, members of the FOMC predict in what direction interest rates will take in the short, medium and long term. Based on this fact, the Fed has a real practical opportunity to adjust interest rates de facto at any time. At this meeting, the FOMC also slightly adjusted its economic expectations till the end of 2021. In its Summary of Economic Projections the FOMC raised estimates of expected growth. In 2021 the Fed expects the Gross Domestic Product (GDP) to increase by 7.0%, compared to the forecast of 6.5% from its March meeting. The Fed also raised its GDP forecast for 2023 to 2.4% from the previously expected 2.2%. It has also sharply raised inflation forecasts for 2021 which is now estimated at 3.4%, which is above its previous estimate of 2.4%. The central bank also slightly increased its PCE inflation estimates for 2022 and 2023.