Fed sees three rate hikes in 2022 as inflation battle begins

FILE PHOTO: Federal Reserve building in Washington, DC
FILE PHOTO: The Federal Reserve Building is pictured in Washington, DC, U.S., August 22, 2018. REUTERS/Chris Wattie/File Photo

December 15, 2021

By Howard Schneider

WASHINGTON (Reuters) – The Federal Reserve, signaling its inflation target has been met, said on Wednesday it would end pandemic-era bond purchases in March and pave the way for more interest rates three-quarters of a percentage point by the end of 2022 as it exits policies enacted at the start of the health crisis.

In new economic projections released after the conclusion of a two-day policy meeting, officials forecast inflation to come in at 2.6% next year, compared with the 2.2% expected. predicted in September and the unemployment rate will fall to 3.5% – roughly if not exceeding full employment.

As a result, officials on average predict the Fed’s overnight benchmark rate will need to rise from its current near-zero levels to 0.90% by the end of 2022. That would start a rate hike cycle that will prompt Fed’s policy rate increased. to 1.6% in 2023 and 2.1% in 2024 – close to but never above what it would be considered limiting economic activity.

All in all, it’s the “soft landing” that Fed officials hope will materialize, with inflation gradually easing over the coming years while unemployment remains low in a growing economy. .

The timing of the first increase this year will be based solely on the path of the jobs market which is expected to continue to improve in the coming months, the central bank said.

Rejected from the policy statement that any reference to inflation was “temporary,” the Fed instead acknowledged that price increases had exceeded the 2% target “for some time.”

Annual inflation has more than doubled the Fed’s target in recent months.

To open the door for a rate hike, the Fed announced it is doubling its bond-buying pace, putting it on track to end the program, which initially started at $120 billion per month, in March.

US stocks added modest gains after the release of reports and forecasts while Treasury yields rose. The dollar strengthened against a basket of major trading partners’ currencies.

Interest rate futures traders have priced in a first hike in May and two more in late 2022.

While the Fed makes any rate hike subject to some further improvement in the job market, new policy projections leave little doubt that borrowing costs will rise next year, does not cause a major economic shock. All 18 policymakers indicated that at least a single rate increase was appropriate before the end of 2022.

All told, the projections and policy statements are just beginning to define the central bank’s plan to “normalize” monetary policy after nearly two years of extraordinary efforts to nurse the economy through. consequences of the pandemic.

That’s still a work in progress, the Fed admitted, with the new Omicron coronavirus variant adding to the uncertainty about the economy’s performance.

At this point, however, the Fed said economic growth was still expected to be 4.0 percent next year, up from the 3.8 percent expected in September and more than double the trend. basic direction of the economy.

Fed Chair Jerome Powell is scheduled to hold a press conference at 2:30 p.m. EST (1930 GMT) to detail the new policy statement and answer questions about the bank’s economic outlook. center.

(Reporting by Howard Schneider; Editing by Paul Simao) Fed sees three rate hikes in 2022 as inflation battle begins

Bobby Allyn

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