WASHINGTON – Despite a substantial upgrade to its economic outlook, the Federal Reserve on Wednesday held its key interest rate near zero, continued to forecast no rate hikes through 2023 and vowed to maintain its bond-buying stimulus.

The central bank is struggling to acknowledge forecasts that have suddenly turned more bullish while promising to stay the course with rock-bottom rates and massive bond purchases as long as the economy remains hobbled by the COVID-19-induced downturn.

Some economists expected the Fed policymakers to stick to their December estimate of no rate increases through 2023 while others reckoned the brighter outlook would all but force the officials to move up their projected timeframe to show they’re ready to stave off a potential spike in inflation.

On Wednesday, 11 officials indicated they prefer no hikes of the near-zero federal funds rate through 2023 while seven now foresee the rate above that level that year, up from five at the December meeting. As a result, their median estimate remained at no rate increases through that period. Still, it’s notable that four policymakers envision the first rate increase next year.

Wall Street cheered the announcement, with the S&P 500 up 20 points, or 0.5%, to 3,962. Ten-year Treasury yields were largely unchanged at 1.66%.

The Fed also stepped up its economic forecast, predicting growth of 6.5% this year as unemployment falls from 6.2% to 4.5% by year-end. Fed officials believe a key inflation measure will hit 2.1%, just above their 2% target, in 2023.

“Following a moderation in the pace of the recovery, indicators of economic activity and employment have turned up recently, though the sectors most adversely affected by the pandemic remain weak,” the Fed said in a statement after a two-day meeting.

In February, retail sales pulled back, but that was partly due to harsh weather and followed a blockbuster 7.6% gain in January. And employers added 379,000 jobs last month after a soft patch the previous two months amid pandemic surges.

Driving the rosier outlook are the $2.8 trillion in COVID-19 relief packages Congress has passed since December, declining COVID-19 cases and fast-growing vaccinations.

The improving backdrop has led fed fund futures markets to predict three rate hikes in 2023. And 10-year Treasury yields, which affect mortgage rates, have climbed from 0.92% to 1.68% so far this year on the prospect of a hotter economy and faster inflation, raising concerns that the trend could crimp the roaring housing and stock markets.

In its statement, the Fed reiterated it will keep its benchmark rate near zero until the economy returns to full employment and inflation has risen above its 2% target “for some time.” The central bank also repeated it would continue to purchase $120 billion a month in Treasury bonds and mortgage-backed securities to hold down long-term rates “until substantial further progress has been made toward” the Fed’s employment goals.

Some economists predict the Fed will begin tapering its bond purchases in 2023 before raising its key rate the following year.

To curtail rising Treasury rates, the Fed could shift its bond purchases to those with longer maturities or announce it will buy enough bonds to keep the yield from rising above a target – a strategy known as yield curve control. But so far, Fed officials have shown little inclination to adopt such measures.

Fed views: The economy

Fed policymakers predict the economy will grow 6.5% this year – which would be its best showing since 1984 – up from their 4.2% forecast in December, according to their median estimate. They project growth of 3.3% in 2022, slightly above their previous forecast.

Last year, the economy shrank 2.4% as a result of the coronavirus recession, its worst performance since just after World War II. But top economists expect the nation’s gross domestic product to reach its pre-crisis level by midyear. By next year, they believe, GDP likely will top the level it would have achieved if the pandemic had not occurred, largely because of the government’s unprecedented stimulus packages, which have totaled about $6 trillion since the outbreak began.

The latest $1.9 trillion aid package includes the extension of enhanced unemployment benefits to 11 million Americans, $1,400 checks to most individuals, and nearly $30 billion in grants for the beleaguered restaurant industry.

There are risks to the robust outlook, especially COVID-19 variants that resist vaccines.


Unemployment is projected to fall from 6.2% to 4.5% by the end of the year and 3.9% by the end of 2022, the Fed’s median estimate shows.

The nation has recovered 12.9 million, or 58%, of the 22.4 million jobs wiped out in the health crisis as restaurants, shops and other businesses shuttered by the coronavirus outbreak have reopened or scaled up.

But that still leaves the U.S. 9.5 million jobs short of its pre-pandemic mark. Several million Americans have been permanently laid off, millions of others have dropped out of the labor force and hundreds of thousands of small businesses have closed for good.


The Fed predicts annual inflation, at 1.5% in January, will reach 2.4% by year-end, up from 1.8% in its previous forecast.

A core measure that strips out volatile food and energy items – which the Fed watches more closely – is projected to end the year at 2.2%, above its prior 1.8% forecast. The core reading is expected to be 2% in 2022 and 2.1% in 2023, up from the Fed’s prior estimates of 1.9% and 2%, respectively.

Some economists worry the government stimulus, combined with huge pent-up demand from consumers and a shortage of workers to serve them, could cause inflation to spike, potentially derailing the recovery.

Powell, however, has said he expects inflation to jump just temporarily by midyear. Prices will be up sharply compared to a year ago, he noted, when the cost of items such as air fares and hotel rates tumbled in the early days of the pandemic.


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