Tue, 03 Aug 2021

The U.S. Federal Reserve signaled Wednesday a sooner-than-expected increase in interest rates as the COVID-19 pandemic continues to recede and inflation continues to rise.

In a statement, the Fed said it would likely raise the short-term interest rate twice by late 2023. It had previously said there would be no hike before 2024.

The Fed has kept interest rates near zero during the pandemic, but now it sees the threat of the pandemic dissipating as the economy heats up.

"Progress on vaccinations has reduced the spread of COVID-19 in the United States. Amid this progress and strong policy support, indicators of economic activity and employment have strengthened," the Fed said in a statement.

Another reason for the change in position is inflation, which in May jumped 5% compared with a year ago, according to the government. It was the largest 12-month increase in prices since 2008, The Associated Press reported. The Fed raised its inflation outlook to 3.4% by year's end, up from the 2.4% projected in March.

Despite the economic growth, job growth has been lacking. There are still 7.5 million fewer jobs than in February 2020, when the pandemic hit.

The Fed's statement sent stocks lower and bond yields higher.

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