Wednesday , January 27 2021

CBO believes the Federal Reserve will raise interest rates this year by disagreeing with Wall Street



The projections in the CBO report show that GDP is likely to grow by 2.3% in 2019, but will then slowly rise to 1.7% in 2020-23. This is actually below the Fed's expectations, which is for 2.3% profit in 2019, followed by 2% and 1.8% in the coming years in a long-term trend of 1.9%.

The report notes that the Federal Reserve should be kept from the "gap in production" or from the difference between actual GDP and its potential.

When the economy grows faster than its potential, it puts pressure on supplies and thus increases inflation. CBO expects the gap will remain positive until 2022 when it turns out to be negative and then resolves.

"The positive output gap shows that demand for goods and services temporarily exceeds the maximum sustained capacity of the economy to supply, which leads to increased demand for labor as well as pressure to raise inflation and interest rates," the report said.

The Federal Reserve is charged with keeping inflation around 2%, although officials have indicated that the goal is "symmetrical", which means they will not be worried if it exceeds or reduces the mandate with little difference. The Federal Reserve has approved four increases in the quarter in 2018, and now the cost of funds ranges between 2.25 and 2.5%.

The markets expect almost no chance of raising the interest rate during the Open Market Committee meeting this week. The likelihood increases slowly over the year, with traders' prices up 22% chance of an increase by December, according to CME's futures tracer.


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