If the Federal Reserve is to be believed, a stronger economy is soon to emerge as the United States turns the corner on the COVID-19 pandemic. And while the Fed expects inflation to also increase, in a recent meeting it stated that it will not institute any rate hikes — at least for the next several years. In fact, the Fed doesn’t see any rate hikes happening until at least 2023 — news that caused the stock market to rise by several hundred points when it was announced following its recent meeting.
In addition, the Fed also voted to keep short-term borrowing rates near zero.
As the United States continues to navigate the COVID-19 pandemic, the Fed’s actions — or lack thereof — have been significant in keeping the economy as steady as possible and not causing any further damage. Not instituting any rate hikes for at least several more years look to keep the economy on the upswing as vaccinations ramp up and more parts of the economy are likely to reopen.
More encouraging news to come out of the Fed’s most recent meeting is its projections for the U.S. gross domestic product (GDP) in 2021. As you might recall, in the second quarter of 2020, the GDP dropped by about 33 percent before rebounding in the third and fourth quarters to round out the year on a positive note.
The Fed estimates the 2021 GDP to increase by about 6.5 percent. And while it expects this increase to level off in a few years, this uptick in production is welcome news to an economy that was hard hit for much of 2020. For reference, the 6.5 percent projection is an increase from the original 4.2 percent GDP gain that was projected for 2021 in December of last year.
Furthermore, unemployment also looks to improve as 2021 continues. Currently at around 6.2 percent, the Fed projects this to improve by a few percentage points in 2021, eventually decreasing to about 4.5 percent. Longer-term projections have unemployment dipping to as low as about 3.7 percent in a few years before settling into a 4 percent rate in 2023 and beyond.
It can be difficult to make sense of meetings of the Federal Reserve and what any discussion or subsequent action that is taken truly means. In this case, it’s important to know that there will be little to no change in current interest rates until there’s more significant improvement in the U.S. economy as a whole. And while the 2 percent inflation rate that is projected may seem off-putting to many, the Fed also believes it can help control this should it get any further out of hand than what is expected.