Fed doubles taper, hints at three rate hikes across inflation axis in 2022

Beginning one of the most aggressive policy pivots in years, the central bank said on Wednesday it would double the speed at which it is expanding purchases of Treasury and mortgage-backed securities to $30 billion a month, This keeps the program on track to end it early. 2022, rather than the middle year as initially planned.

puts up a sharp pullback Fed Chair Jerome Powell Raising rates earlier than previously expected to counter price pressures, if necessary, even as the pandemic poses an ongoing challenge to economic recovery. The Fed expressed concern over the new Omicron strain, saying that “risks remain to the economic outlook, including new variants of the virus.”

Estimates published with the statement showed that officials expect a three-quarter-point hike in the benchmark federal funds rate next year to be justified, after keeping the cost of borrowing near zero since March 2020.

This is a major change from forecasts last updated in September, when the committee was split equally on the need for any rate hikes in 2022. The new projections also showed that policymakers saw a further three increases in 2023 and two in 2023 as appropriate. More in 2024, bringing the funds rate to 2.1% by the end of that year.

The policy-making Federal Open Market Committee said in a statement after the two-day meeting that the “sudden change in taper pace” reflects the development of inflation and a further recovery in the labor market. The Fed reiterated that it is “ready to adjust” the pace of purchases if warranted by a change in the economic outlook.

The yield on the 10-year Treasury rose while the yield curve flattened sharply. Meanwhile, the S&P 500 index declined slightly earlier in the day and the dollar gained. Traders pegged the amount of the Fed’s interest rate increase for 2022 by about 75 basis points.

employment target

On interest rates, “with inflation exceeding 2% for some time, the Committee expects it to be appropriate to maintain this target range until labor market conditions reach a level consistent with the Committee’s assessment of maximum employment.” Goes.”

The FOMC vote was unanimous. Powell will hold a virtual post-meeting press conference at 2:30 p.m. Washington time.

“The supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to higher levels of inflation,” the FOMC said.

While the quick taper was in line with the expectations of most economists surveyed by Bloomberg News, the interest rate path was sharper than what analysts have generally seen.

According to trading in futures contracts, investors expected rates to rise by mid-year, with a move as early as March.

Powell, who was recently re-nominated by President Joe Biden for a second four-year term at the top of the central bank, has faced increasing pressure from both Democrats and Republicans to take more aggressive action on inflation.

Fed officials were shielded from price pressure, which they argued will fade as the world adjusts to Covid-19. Instead, the pandemic continues and inflation has picked up due to supply-chain constraints and strong demand amid massive fiscal and monetary policy support.

In the FOMC statement, officials removed an earlier reference to factors reflecting inflation that were “expected to be provisional.” Powell told lawmakers last month that it was time to “retire” the Fed’s description of high inflation as “temporary.” Held for most of 2021.

Consumer prices rose 6.8% in the year through November, marking the fastest growth since 1982. In recent months, rising food and energy prices and accelerating rental inflation have contributed more to overall inflation than earlier in the year, when prices spiked largely in the used-car market and a rebound. It focuses on the leisure and hospitality sector.

Unemployment fell to 4.2% in November from 4.6% in October, a faster pace of recovery than forecasters had predicted. Still, the gap between the white and black unemployment rates remains wide – 3.7% and 6.7% respectively – and Fed officials have said they will take those disparities into account under a new “broad-based and inclusive” approach. . Employment, which he announced last year.

The FOMC’s average estimate for inflation for 2022 was revised to 2.6% from 2.2% in September. And it now estimates the unemployment rate at the end of next year to be 3.5% versus 3.8% in September.

Biden still has three more open seats to fill on the central bank’s board of governors in Washington and is expected to announce his selection in the coming days. His selection, as well as whoever the Dallas and Boston Fed Banks choose to be their next president, could play an important role in the direction of the FOMC next year.

Those changes also mean that the dot plot rate estimates released Wednesday reflect the views of many officials who will not be part of the decision-making process as the Fed navigates the next phase of economic recovery from the pandemic.