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Federal Reserve: Expect 3 interest-rate hikes in 2022

Fed signals interest rate hikes to fight inflation
Fed signals interest rate hikes to fight infl... 02:06

The Federal Reserve on Wednesday announced that it is accelerating its removal of monetary support for the economy, citing a rise in inflation that has seen the biggest jump in prices nearly 40 years. In a move to cool growth, policy makers also said they expect to hike interest rates three times in 2022.

"Employers are having difficulties filling job openings, and wages are rising at their fastest pace in many years," Federal Reserve Chair Jerome Powell told reporters on Wednesday. Inflation has been rising as supply chains are disrupted by the coronavirus, he said.

"The inflation that we got was not at all the inflation we were looking for," Powell said. 

Federal Reserve's plan to fight inflation 06:11

Despite the surge in prices, Powell stuck an upbeat tone about the overall economy, noting ongoing strength in consumer spending, which accounts for roughly two-thirds of U.S. economic activity. "Fundamentally, the consumer is very healthy," he said.

Policy makers expect the U.S. economy to grow 4% in 2022 and unemployment to fall to 3.5% by year-end, according to the Fed's latest growth forecast.

Stock markets cheered the decision, with the S&P 500 gaining 1.6%, the Dow rising 1.1% and the tech-heavy Nasdaq composite surging 2.1% after Powell's speech.

Yanking support

Since the spring of 2020, the Fed has been buying about $120 billion a month in bonds, providing the financial juice to bolster the pandemic-stricken economy and helping to keep interest rates low. Last month, in view of the strengthening economy and persistently high prices, the Fed said it planned to wind down those purchases, putting it on pace to end that support by mid-June.

On Wednesday, however, the Fed said it would hasten that withdrawal. 

"The economy no longer needs increasing amounts of policy support," Powell said.

The Fed said it would reduce the rate of bond purchases by $30 billion a month, with the program terminating in March, setting the stage for the central bank to hike interest rates in the ensuing months. 

What about interest rates?

Projections released by the central bank predict three interest-rate hikes next year and three more in 2023. That's significantly more than the single rate jump it had forecast in September, and indicates the central bank is much more concerned about rising prices than it was two months ago.

Economists said the rate hikes could begin as soon as March, but some expect economic weakness to push lift-off until the summer.

Asked about the change in attitude, Powell told reporters: "It's essentially higher inflation and faster, much faster progress in the labor market." 

He also noted that high inflation could dampen the economic recovery by canceling out the wage gains that lower-paid workers have made in recent months amid a widespread labor shortage. 

"We have to make sure that higher inflation doesn't get entrenched. It's one of the two main threats, the other being the pandemic, to getting back to maximum employment," he said.

Why it matters

That benchmark interest rate — which was slashed to near-zero last year and remains there — affects what consumers and businesses pay for mortgages, credit card purchases, personal and business loans, and other debt. Raising the rate makes it more expensive to borrow or spend money, slowing down spending and potentially tamping down inflation. But hiking the rate too fast could damage the labor market, which is still below its 2019 levels.

Economists said the rate hikes could begin as soon as March, but some expect economic weakness to push lift-off until the summer.

"As long as job growth remains healthy, the inflation rate doesn't plunge, and the stock market remains in a general uptrend, it is good bet that a new rate hike cycle will begin within the next year," Bryan Jordan, deputy chief economist at Nationwide, said in a note, adding, "Rates may very well begin to climb next year, but there is still a great deal of uncertainty over the pace of the ascent."

The bigger picture

Prices for goods from food to fuel began surging in April and recently hit a 39-year high. Fed officials, who initially maintained that price increases would be temporary, have recently backed off that assessment.

The Fed has two main jobs: Keeping prices stable and ensuring maximum employment. That's a tricky balancing act, as the pandemic has shown. Even with the unemployment rate down to 4.2%, there are nearly 4 million fewer workers than before the pandemic, and hiking interest rates too quickly could slow their return to the workforce.

Brian Coulton, chief economist with Fitch Ratings, said the Fed's latest inflation readout amounts to a "major pivot." In particular, Fed officials acknowledge that rebounding consumer demand has swamped supplies and that inflation has exceeded the bank's 2% target "for some time."

One sign of that shift: In its policy statement, the Fed's rate-setting panel banished any reference to inflation as likely being "transitory" — a description Powell had emphasized for months as inflation was heating up earlier this year.

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