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Fed aims
for an early end of tapering by March next year and plans rate hikes over
three occasions.
The pace
of tapering expected to double to $30 billion per month
Tapering expected to end in March and interest
rate hikes to take place subsequently over three occasions
Rate hikes of up to 2.1% prospected by the end
of 2024
The Federal Reserve announced that it would
shift to an earlier end of their asset-buying program initiated during the
Covid pandemic-era as Fed officials grow concerned about the persistence of
inflationary pressures. This signals a strong likelihood of an interest rate
hike next year much earlier than initially planned. The Fed said it reached to
an agreement during the two-day Federal Open Market Committee (FOMC) meeting to
double the pace at which it is scaling back purchases of Treasuries and
mortgage-backed securities (tapering) to $30 billion a month from $15 billion
per month. Scaling back purchases of Treasuries and mortgage-backed securities
much more than planned puts it on track to conclude the economic stimulus
program in March 2022.
Officials expect three increases in the
benchmark federal funds rate will be appropriate next year while maintaining
near-zero rates until the end of the year, which has been ongoing since March
last year. That marks a major shift from the last time forecasts were updated
in September, when the committee was split on the need for any rate increases at
all in 2022. Fed officials project to see another three increases as
appropriate in 2023 and two more in 2024, bringing the funds rate to 2.1% by
the end of that year.
It is reportedly known that the Fed expected
rate hikes for next year by citing a separately released point chart. Out of a
total of 18 FOMC members, 10 members expect hikes between 0.88 and 1.12% and
five members expect hikes between 0.63 and 0.87%. A Fed official stated, “With
inflation having exceeded 2% for some time, FOMC expects it will be appropriate
to maintain this target range until labor market conditions have reached levels
consistent with FOMC’s assessments of maximum employment.” The unemployment
rate in the U.S. saw a sharp decrease to 4.2% in November from the peak 14.8% rate
reached in April 2020.
While the accelerated taper was in line with
expectations by a vast majority of economists, the interest-rate path was
steeper than what analysts had seen. The Fed also expressed concern arising
from the Omicron variant. Analysts also assessed, “Ricks factors, including the
Omicron variant, still remain, which can affect economic forecasts.” The Fed
decided to initiate tapering on November 3rd after the FOMC meeting
held on that day. It announced reductions of $15 billion each month from the
current $120 billion in monthly asset purchases that the Fed is buying since
the outbreak of the Covid Pandemic.
Opinions forecasting a short-lived, temporary
high inflation were dominant until last month. However, Fed Chair Jerome Powell
told lawmakers during a Senators’ meeting last month that it was time to
“retire” the Fed’s description of high inflation as “transitory,” and signalled
a possibility of an earlier-than-expected end of tapering. Consumer prices rose
6.8% in the year through November, marking the fastest pace of increase in four
decades. Concern over a faster increase of consumer prices is mounting, fuelled
by rising raw material prices and salary increases, which may further
accelerate increases in consumer prices.
[This news is provided by Newsis]
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