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 its pandemic-era bond purchases in March and pave the way for three quarter-percentage-point interest rate hikes by the end of 2022 as it exits from policies enacted at the start of the health crisis.
In new economic projections released following the end of a two-day policy meeting, officials forecast that inflation would run at 2.6% next year, compared to the 2.2% projected in September, and the unemployment rate would fall to 3.5% – near if not exceeding full employment.
As a result, officials at the median projected the U.S. central bank’s benchmark overnight interest rate would need to rise from its current near-zero level to 0.90% by the end of 2022. That would kick off a hiking cycle that would see the Fed’s policy rate climb to 1.6% in 2023 and 2.1% in 2024 – nearing but never exceeding levels it would consider restrictive of economic activity.
“The economy no longer needs increasing amounts of policy support,” Fed Chair Jerome Powell said in a news conference after the meeting. “In my view, we are making rapid progress toward maximum employment.”
The scenario laid out by the Fed is, in outline, the “soft landing” that its officials hope will transpire, with inflation gradually easing in coming years while unemployment remains low in a growing economy.
The timing of the first hike this year, the central bank said, would now hinge solely on the path of a job market that is expected to continue improving in coming months.
Dropped from the latest policy statement was any reference to inflation as “transitory,” with the Fed instead acknowledging that price increases had exceeded its 2% target “for some time.”
Annual inflation has been running at more than double the Fed’s target in recent months.
To open the door to rate hikes, the Fed announced it was doubling the pace of its bond-buying “taper,” putting it on track to end the purchases of Treasuries and mortgage-backed securities by March. Until recently, the central bank had been buying $120 billion of Treasuries and MBS each month to help fuel the economic recovery.
U.S. stocks added to modest gains after the release of the statement and projections while yields on Treasury securities rose. The dollar strengthened against a basket of major trading partners’ currencies, but was still lower on the day.
Traders in interest rate futures were pricing a first hike in May, and two more by the end of 2022.
NORMALIZING POLICY
Though the Fed made any rate hikes contingent on some further improvement in the job market, the new policy projections left little doubt that borrowing costs will rise next year, absent a major economic shock. All 18 policymakers indicated at least a single rate increase would be appropriate before the end of 2022.
All told, the new projections and policy statement began to pin down the central bank’s plan to “normalize” monetary policy following nearly two years of extraordinary efforts to nurse the economy through the fallout of the pandemic.
That is still underway, the Fed acknowledged, with the new Omicron coronavirus variant adding to uncertainty about the course of the economy.
But the Fed, at this point, said economic growth is still expected to be 4.0% next year, an increase over the 3.8% projected in September and more than double the economy’s underlying trend.
(Reporting by Howard Schneider; Additional reporting by Jonnelle MarteEditing by Paul Simao)
