Fed’s Newest ‘Dot Plot’ Shows Growing Appetite for Rate Hikes as Inflation Bites

By Tom Ozimek
Tom Ozimek
Tom Ozimek
Tom Ozimek has a broad background in journalism, deposit insurance, marketing and communications, and adult education. The best writing advice he's ever heard is from Roy Peter Clark: 'Hit your target' and 'leave the best for last.'
September 23, 2021 Updated: September 23, 2021

While Federal Reserve policymakers voted on Sept. 22 to keep rates at near zero, they also raised their expectations for rate increases, suggesting a mix of optimism about the pace of economic recovery and fear that easy money policies would fan the flames of inflation.

The Federal Open Market Committee (FOMC) released updated economic projections (pdf), including the so-called “dot plot” that charts the 18 FOMC members’ future expectations for rates.

While relatively little changed in interest rate hike expectations for 2022, FOMC members raised their assessment significantly for the target federal funds rate for 2023 in the September dot plot, compared to one issued in June (pdf).

While five members in June thought rates should remain in the zero-to-0.25 percent range in 2023, that number dropped to just one in September. By the end of 2023, the updated September median dot anticipates three to four total rate increases, compared to two boosts expected in the June projection.

The updated projections come as inflation has been running far hotter than the Fed’s 2 percent target, posing a challenge for policymakers who are wary of pulling back support before the labor market shows sufficient recovery.

Epoch Times Photo
Federal Reserve economic projections issued in June (L) and September (R), with 2023 federal funds rate assessments highlighted in red. (Federal Reserve)

Speaking at a press conference following the conclusion of the FOMC meeting, Fed Chairman Jerome Powell acknowledged the persistence of inflationary risks.

“As the reopening continues, bottlenecks, hiring difficulties, and other constraints could again prove to be greater and longer-lasting than anticipated, posing upside risks to inflation,” Powell said.

September’s updated economic projections show that FOMC members think inflation will run hotter in 2021 than previously expected, though they continue to believe price pressures will moderate in 2022.

“Relative to the assessments made in June, the impact of the Delta variant on the economic recovery is clear,” Bankrate Chief Financial Analyst Greg McBride told The Epoch Times in an emailed statement.

“Growth was revised notably lower for this year and given a boost for 2022, and further declines in unemployment were downgraded. More troubling was that inflation indicators were adjusted much higher for this year and bumped up for 2022 as well.”

FOMC members predicted in September that the annual personal consumption expenditures (PCE) index inflation rate for this year would hit 4.2 percent, up from the 3.4 percent they predicted in June. Next year’s projected inflation rate inched up to 2.2 percent from 2.1 percent, while the 2023 rate remained unchanged at 2.2 percent.

Powell argued at a Sept. 22 press conference that much of the upward pressure on prices is the result of pandemic-related supply-side bottlenecks and shortages. He once again made the case for transitory inflation.

“These bottleneck effects have been larger and longer-lasting than anticipated,” Powell said.

“While these supply effects are prominent for now, they will abate. And as they do, inflation is expected to drop back toward our longer-run goal” of around 2 percent, he said.

Powell insisted that “if sustained higher inflation were to become a serious concern,” the Fed would “certainly respond” to bring it back down to target.

But some economists believe the Fed is likely to err on the side of letting inflation run too hot.

“Faced with a debt trap and persistently above-target inflation, they will almost certainly wimp out and lag behind the curve, even as fiscal policies remain too loose,” wrote economist Nouriel Roubini, in a recent op-ed.

Roubini, who at the height of the 2007–08 market exuberance made a gloomy-yet-accurate prediction of a crash, has warned that today’s extremely loose monetary and fiscal policies could combine with supply-side shocks to result in 1970s-style stagflation, in which growth is sluggish but prices continue to rise sharply.

“The resulting growth would be associated with persistent above-target inflation, disproving central banks’ belief that price increases are merely temporary,” he wrote.

Meanwhile, Norway on Sept. 23 became the first Western nation to raise key interest rates since the global rush to drop them at the start of the COVID-19 outbreak.

Tom Ozimek
Tom Ozimek has a broad background in journalism, deposit insurance, marketing and communications, and adult education. The best writing advice he's ever heard is from Roy Peter Clark: 'Hit your target' and 'leave the best for last.'