Fed could hike rates 3 times in 2022 and speed up the end of bond purchases
Federal Reserve policymakers said on Wednesday they would cut their stimulus more quickly at a time of rapid inflation and strong economic growth, ending a difficult year with a pronounced political pivot that could lead to higher rates. interest in 2022.
A policy statement released by the central bank detailed a quicker end to the monthly bond purchases the Fed has used throughout the pandemic to keep money through markets and to support growth, just like a new set of economic projections showed that policymakers expect to raise interest rates three times next year.
As for the bond buying program, officials are cutting their purchases to twice as much as they announced last month, a pace that would put them on track to end the program in March. The move came “in light of the development of inflation and the continued improvement in the labor market,” according to the policy statement.
Fed Chairman Jerome H. Powell, speaking at a press conference after the Fed meeting, said “a strengthening labor market and high inflationary pressures” prompted the central bank accelerate reductions in asset purchases.
“Economic developments and changes in outlook justify this development,” said Mr. Powell. He noted that the supply chain disruptions have been greater and have lasted longer than expected, and price increases are likely to continue into the next year.
Ending the bond buying program sooner will allow the central bank to raise its key interest rate – the Fed’s most traditional and powerful tool – faster if officials decide it is necessary to control inflation. The Fed’s economic projections suggest that the pace of rate hikes is accelerating as the economy recovers. Rates are currently set at near zero, and officials predict rates will settle at 2.1% by the end of 2024.
“As inflation has been above 2% for some time, the Committee expects it to be appropriate to maintain this target range until labor market conditions have reached levels consistent with estimates of the United States. committee on maximum jobs, “the Fed said in its new statement – putting the burden of rate increases directly on the progress of the labor market.
Mr. Powell, in his remarks, suggested that the labor market is approaching that benchmark.
“In my opinion, we are making rapid progress towards as many jobs as possible,” said Powell.
By slowing bond purchases and moving decisively toward higher borrowing costs, the Fed is adding less juice to economic expansion and completing a pivot to a fight against inflation. While officials have spent much of the year charting a patient course to cut aid to the economy during the pandemic, they have become more proactive in recent weeks as they increasingly feared a surge in the disease. price this year does not persist.
What you need to know about inflation in the United States
Consumer prices climbed 6.8% in November from a year earlier, the fastest rate of increase since 1982. The Fed’s preferred inflation indicator showed slightly slower gains but also increased sharply.
Mr Powell said that a quicker conclusion of the bond purchase would allow the Fed to better respond to a range of possible economic outcomes.
When asked if there would be a big gap between the end of bond purchases and the start of rate hikes, as there was in the last economic rebound, Mr Powell replied that the situation is different this time.
“The economy is so much stronger now,” said Powell, later adding that “there would be no need for that kind of long delay.”
Fed officials initially expected the price hike this year to fade. Instead, pressures have spread beyond pandemic-affected properties, which have fallen victim to tangled supply chains, and into rents and shelters. In these broad categories, the upward trends may prove to be more lasting. Wages are rising, as are consumer inflation expectations, which could also help price increases persist.
The Fed has watched the evidence accumulate with suspicion, although most officials still hope inflation will return to their annual average target of 2% as global shipping lanes recede, that factory output will rise for the next year. meet demand and that consumers will turn to more normalcy. spending habits after rushing to buy sofas, cars and stationary bikes during the pandemic.
But officials had started to give up on helping the economy as much, announcing the initial plan to slow down their bond buying program following their November meeting. Mr Powell signaled late last month and early December that the central bank was increasingly focusing on managing the risk that rapid price gains might persist – by initiating the central bank shift. .
“I think the risk of higher inflation has increased,” Powell said in testimony to Congress in late November.
The transition became official on Wednesday.
“They are revising inflation, revising unemployment and therefore increasing the trajectory of interest rates,” Neil Dutta, head of US economics at Renaissance Macro, said in reaction to the news. “It’s a bit of a 180 from Powell.”
Fed officials appreciated the speed of the labor market recovery. The unemployment rate fell to 4.2%, down sharply from double-digit highs it reached at the start of the pandemic. Officials now expect unemployment to fall to 3.5% – off its very low level as the pandemic approaches – by the end of next year, their updated economic projections have shown. day.
“Job creation has been strong in recent months and the unemployment rate has dropped significantly,” the Fed said in its new policy statement.
Yet many people remain out of the workforce – some because they have retired, but others because of fear of the virus or a lack of childcare. This makes it harder to judge how close the economy is to the Fed’s “maximum jobs” target.
Mr Powell has at times suggested that full employment could be achieved next year, but he also expressed his uncertainty about the call.
“I think there is room for a lot of humility here as we try to think about what the maximum job would be,” he told a press conference in November.