Due to rapid inflation and a strengthening economy, Federal Reserve policymakers announced a policy pivot that could usher in higher interest rates in 2022.

“Risk of Higher Inflation Has Increased”

Last month, Jerome Powell, chair of the Federal Reserve, said in his testimony to Congress, “I think the risk of higher inflation has increased.”  This month, that “risk” became more risky.

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The latest policy statement issued by the Fed on December 15 reflected Powell’s thoughts around higher inflationary risks.  In a clear about-face policy pivot, the Fed’s latest position stated that its pandemic relief monthly bond-buying program is to cut its purchases by two times as much as it had announced last month.  This slashing of the bond-buying program would put the Fed on track to end this economy relief program altogether in March 2022.

Powell later said at a news conference following the Fed’s December meeting that a “strengthening labor market and elevated inflation pressures” were the stimuli that pushed the central bank to fast-track its reductions in asset purchases.

Powell also pointed out that supply chain disruptions have both lasted longer and been larger than anticipated.  He indicated that inflationary price gains “will likely continue well into next year.”

Obviously, ending the bond-buying program sooner rather than later sets the stage for the central bank to raise its policy interest rate sooner rather than later as well…if “…officials decide that doing so is necessary to keep inflation under control.”

“Rapid Progress toward Maximum Employment”

Powell also stated, “In my view we are making rapid progress toward maximum employment.”

Towards this end goal of reaching maximum employment, the Fed announced that it expected to raise interest rates three times in 2022.  (Prior to the economy’s currently fast-rising inflationary risks and the sooner-than-expected labor market health, the Fed’s now former policy was to keep interest rates at its near-zero lows through 2022.)

The Fed’s economic projections now suggest rates to stand at 2.1% at the end of 2024.

Also, the Fed announced its intentions to raise interest rates three times during 2022.

Bottom Line

By slowing bond-buying quickly and moving towards raising borrowing costs by raising interest rates beginning in 2022, the Federal Reserve is pivoting from its economic expansion policies to inflation-fighting policies.

Apparently, the Fed has become as worried about this year’s steeply rising prices as are consumers. 

Thanks to The New York Times.








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