The Fed has turned more hawkish at the June meeting. Besides significant upgrades in the GDP growth and inflation forecasts, the median dot plots now project two rate hikes in 2023, compared with no rate hike until 2024. At the press conference, Fed chair Jerome Powell indicated that the members have started talking about tapering. He added that“while reaching substantial further progress is still a ways off, in coming meetings, the committee will assess progress”.

There were few changes in the policy statement. Policymakers acknowledged that the “progress on vaccinations has reduced the spread of COVID-19 in the United States”. Together with “strong policy support, indicators of economic activity and employment have strengthened”. Getting more confident about the economic recovery, the members suggested that “progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy”. The change on the mandate of average inflation targeting was subtle. As noted in the statement, “with inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2% for some time so that inflation averages 2% over time and longer-term inflation expectations remain well anchored at 2%”. In April, the first sentence was “with inflation running persistently below this longer-run goal”, while the rest was the same. This subtle change signals that the acknowledgement hat inflation is no longer running below 2%.

Given the strong recovery since the last meeting, the staff has upgraded the economic projections significantly for this year. GDP is estimated to expand by +7% y/y this year, up from +6.5% in March’s projection. On inflation, headline and core PCE are expected to reach +3.4% and +3%, up from previous estimates of +2.4% and +2.2%, respectively. The unemployment rate would reach 4.5%, unchanged from March.The more upbeat economic outlook and persistently strong inflation have led members to bring forward the possibility of first rate hike. The median dot plots now project that there will be two rate hikes by 2023. Even in 2022, there are now 7 participants anticipating one or two hikes, compared with only four in March.