Fed expected to speed up economic aid withdrawal
Central bank may also announce 2 or 3 rate hikes in 2022 later this week
WASHINGTON — Under Chair Jerome Powell, the Federal Reserve is poised this week to execute a sharp turn toward tighter interest- rate policies with inflation accelerating and unemployment falling faster than expected.
On Wednesday, the Fed will likely announce that it will reduce its monthly bond purchases at twice the rate that Powell had outlined six weeks ago. Those bond purchases are intended to lower longer- term rates, so winding them down more quickly — likely by early spring — will lessen some of the economic aid the Fed supplied after the pandemic erupted last year.
Fed officials are also expected to forecast that they will raise their benchmark shortterm rate, which has been pegged near zero since March 2020, two or three times next year. Rate hikes would, in turn, increase a wide range of borrowing costs. Three three months ago, the Fed had penciled in barely one rate increase in 2022.
The Fed’s pivot comes after consumer inflation reached a four- decade high in November, and it reflects a growing recognition among Powell and other policymakers that the economy hasn’t progressed the way they had expected it would just a few months ago.
For much of 2021, they had calculated that inflation would be “transitory” and were more concerned that unemployment might not fall fast enough. Yet substantial price increases have spread beyond such pandemic- disrupted industries as autos, electronics and building materials into rents, restaurant menus and medical care. Rising inflation has become a heavy burden for many American households, especially those that are struggling to afford food and fuel costs, and a source of public discontent with President Joe Biden and Democrats in Congress.
Fed officials still expect inflation to cool by the second half of next year. Yet they now foresee a significant risk that high prices will persist. That likelihood was reinforced Tuesday by a government report that wholesale inflation jumped 9.6% for the 12 months ending in November, the fastest year- over- year pace on records dating to 2010.
The unemployment rate has also dropped quickly since Fed policymakers last met in early November — from from 4.8% to 4.2% — a sign the economy is solid and edging closer to maximum employment, one of the Fed’s two mandates along with price stability.
Powell said in congressional testimony two weeks ago that the Fed would likely speed up the reduction, or tapering, of its bond purchases. Economists now expect the tapering to end by March, instead of the previous timeline Powell had set of June. Doing so will allow the Fed to begin raising rates earlier next year if it chooses to do so to fight inflation.
“Price increases have spread much more broadly in the ( most) recent few months across the economy, and I think the risk of higher inflation has increased,” Powell said at a Senate committee hearing Nov. 30.