Fed foresees rate hike early next year
WASHINGTON — The Federal Reserve signaled Wednesday that it may start raising its benchmark interest rate sometime next year, earlier than it envisioned three months ago and a sign that it’s concerned that high inflation pressures may persist.
In a statement, the Fed also said it will likely begin slowing the pace of its monthly bond purchases “soon” if the economy keeps improving. The bond purchases have been intended to lower longer-term loan rates to encourage borrowing and spending. At a news conference, Chair Jerome Powell said the Fed could announce a pullback in bond buying as soon as its next meeting in November.
Taken together, the Fed’s plans reflect its belief that the economy has recovered sufficiently from the pandemic recession for it to soon begin dialing back the extraordinary support it provided after the coronavirus paralyzed the economy 18 months ago.
As the economy has steadily strengthened, inflation has also accelerated to a three-decade high, heightening the pressure on the Fed to pull back.
Stock and bond traders appeared pleased by the Fed’s policy statement, at least initially. Soon after it was issued, the Dow Jones Industrial Average’s gain for the day surged from 1% to 1.5%.
The economy has recovered faster than many economists had expected, though growth has slowed recently as COVID-19 cases have spiked and labor and supply shortages have hampered manufacturing, construction and some other sectors. The U.S. economy has returned to its pre-pandemic size, and the unemployment rate has tumbled from 14.8%, soon after the pandemic struck, to 5.2%.
At the same time, inflation has surged as consumer spending and disrupted supply chains have combined to create shortages of semiconductors, cars, furniture and electronics.
Consumer prices, according to the Fed’s preferred measure, rose 3.6% in July from a year ago — the sharpest such increase since 1991.
In its updated quarterly projections, Fed officials now expect to raise their key short term rate once in 2022, three times in 2023 — one more than they had projected in June — and three times in 2024.
That benchmark rate, which influences many consumer and business loans, has been pinned near zero since March 2020, when the pandemic erupted.
Before it starts raising rates, though, the Fed expects to begin paring, or tapering, its $120 billion-amonth bond buying.
“If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted,” the Fed said in a statement issued after its two-day meeting.