Federal Reserve officials seemed divided evenly into two camps about the outlook for inflation, according to minutes of their March meeting released on Wednesday.
“Several” Fed officials said that bottlenecks and strong demand would push up price inflation “more than anticipated,” the minutes said.
At the same time, “several” other Fed officials expressed belief that the factors that had contributed to low inflation over the past decade “could again exert more downward pressure on inflation than expected.”
The Fed upgraded its forecast for growth and employment and forecast that headline inflation would rise to 2.4% rate this year – above the 2% target – but then settle down to 2.1% by 2023.
Despite these changes, the Fed median forecast was for no liftoff in interest rates through 2023.
The Fed cut its policy interest rates to zero last March.
The Fed said it would maintain this easy stance until the economy returns to full employment and inflation has risen to 2% and was on track to rise moderately above 2% for some time.
At the same time, the Fed is buying $80 billion of Treasurys and $40 billion of mortgage-backed securities to help the economy. The Fed has said it would continue these purchases until there is “substantial further progress” in reaching its low unemployment and steady inflation goals.
Markets are focused on when the Fed might make a tapering announcement of the asset purchases.
The minutes said that it would be “some time” until substantial further progress would be realized.
Fed officials said they were happy with the current guidance for the federal funds rate and asset purchases.
“They noted that a benefit of outcome-based guidance was that it did not need to be recalibrated often in response to incoming data or the evolving outlook,” the minutes said.
Fed Chairman Jerome Powell continues to resist providing the calendar-type guidance the market craves, noted Krishna Guha of Evercore ISI.
Guha said he thinks the Fed will signal its future taper plans in August and start tapering in January.
According to the minutes, the Fed staff’s forecast in March was “considerably stronger” than the January forecast.
The economy appeared to be picking up at the beginning of the year by more than expected and the $1.9 trillion stimulus package passed by Congress was considerably larger than the staff had presumed.
The staff said that growth would only slow slightly in 2022 and 2023 “leading to a decline in the unemployment rate of historically low levels.”
The Fed staff sees inflation running a bit below 2% in 2022 and then reach the central bank’s 2% target in 2023.
But “various” Fed officials noted that changes in policy should be based primarily “on observed outcomes rather than forecasts.”
Currently, the economy “was far from achieving the Fed’s broad-based and inclusive goal of maximum employment,” Fed officials said.
Stocks were little changed after the minutes with the Dow Jones Industrial Average
down 9 points in afternoon trading.