Fed Speeds Up Tapering, Projecting 3 Rate Hikes in 2022
The Federal Reserve announced on Dec. 15 that it will end its aggressive pandemic-era stimulus sooner than expected as inflation is becoming “more persistent.”
The central bank will speed up its tapering of bond purchases, bringing the monthly drawdown to $30 billion versus $15 billion announced last month. This would conclude the tapering process in March, paving the way for earlier interest rate increases.
Fed officials now expect three quarter-point rate boosts in 2022 and further three rate increases in 2023. This is a significant shift from the September meeting.
The Fed completed its two-day Federal Open Market Committee (FOMC) meeting on Dec. 15, which was described by market analysts as the most important meeting of the year.
“In light of inflation developments and the further improvement in the labor market, the Committee decided to reduce the monthly pace of its net asset purchases by $20 billion for Treasury securities and $10 billion for agency mortgage-backed securities,” the FOMC statement reads.
“Beginning in January, the Committee will increase its holdings of Treasury securities by at least $40 billion per month and of agency mortgage‑backed securities by at least $20 billion per month,” Fed officials stated, noting that the central bank could adjust the pace depending on the economic outlook.
Speaking at a post-meeting press conference, Fed Chair Jerome Powell said the decision to phase out bond purchases more rapidly is driven by “elevated inflation pressures” and strong labor recovery.
Fed officials stated that they would hold the federal funds rate at a range of zero to 0.25 percent, in line with expectations.
“Job gains have been solid in recent months, and the unemployment rate has declined substantially,” the statement said.
“Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.”
Powell indicated that a change in interest rates may come after March 2022 as rate increases wouldn’t be suitable while the Fed continues to purchase assets.
The Fed’s inflation projections increased for next year, with core inflation at 2.7 percent compared to the 2.3 percent forecast in September.
Powell said that a disappointing metric in the economic recovery has been labor force participation.
“It feels likely now that the return to higher participation is going to take longer,” he said.
While the unemployment rate significantly improved in recent months, millions of Americans are still hesitating to reenter the workforce. In November, the labor force participation rate stood at a 43-year low of 61.6 percent. The economy is running 4 million to 6 million workers short of its pre-pandemic level despite a near-record 11 million open jobs.
The Fed’s announcement is in line with recent market surveys. According to the latest CNBC Fed Survey results, economists, strategists, and money managers anticipated the central bank would stop its asset acquisitions by March 2022 and begin raising interest rates in June 2022.
Powell said the Fed isn’t behind the curve as many critics have argued, adding that the central bank is taking steps “in a thoughtful manner” to address issues, including surging consumer prices.
But will the Fed’s measures be enough to curb 39-year high inflation levels? Financial experts are split on the efficacy of the Fed doubling its pace of tapering the pandemic-era stimulus that was designed to cushion the blows from the economic fallout of COVID-19.
https://www.theepochtimes.com/fed-speeds-up-tapering-projecting-three-rate-hikes-in-2022_4159339.html