Federal Reserve policymakers said on Wednesday they will cut stimulus more quickly at a time of rapid inflation and strong economic growth, ending a challenging year with a decided policy pivot that could lead to higher interest rates in 2022.
A policy statement and a new set of economic projections released by the central bank brought a quicker end to the monthly bond purchases that the Fed has used during the pandemic to lumber money through markets and fuel growth.
Officials are cutting their purchases by twice as much as they announced last month, a pace that would put them on track to end the program altogether in March. That decision came “in light of inflation developments and the continued improvement of the labor market,” the policy statement said.
Fed Chair Jerome H. Powell said in a news conference after the Fed’s meeting that a “strengthening labor market and heightened inflationary pressures” are prompting the central bank to accelerate its cut in asset purchases.
“Economic developments and changes in the outlook justify this evolution,” said Mr. Powell. He noted that supply chain disruptions have been bigger and longer than expected and that price increases are likely to continue well into the next year.
Ending the bond-buying program earlier will put the central bank in a position to raise its key rate – the Fed’s more traditional and powerful tool – more quickly if officials decide it is necessary to keep inflation under control. The Fed’s economic forecasts suggested officials expected three rate hikes next year, which would lead to a faster pace of rate hikes as the economy recovers. The rates are currently close to zero, and officials are forecasting that rates will hit 2.1 percent by the end of 2024.
“As inflation has been above 2 percent for some time, the committee expects it will be appropriate to maintain this target range until labor market conditions reach levels consistent with the committee’s assessments of maximum employment,” the Fed said in a statement. her new statement. responsibility for rate increases squarely on the advancement of the labor market.
Mr Powell suggested in his comments that the job market was getting closer and closer to meeting that test.
“In my view, we are making rapid progress towards maximum employment,” said Mr. powell.
By slowing down bond buying and moving resolutely toward raising borrowing costs, the Fed is adding less power to economic expansion and completing a pivot toward fighting inflation. While officials spent much of the year charting a patient path to winding down their aid to the pandemic-era economy, they have become more proactive in recent weeks as they became more concerned that a price spike could happen this year. persist.
What you need to know about inflation in the US
Consumer prices rose 6.8 percent in November from a year earlier, the fastest rate of increase since 1982. The Fed’s preferred inflation gauge has risen slightly more slowly, but has also risen sharply.
Mr Powell said an earlier completion of bond buying will allow the Fed to better respond to a range of potential economic outcomes.
“The economy is so much stronger now,” said Mr. Powell, and he asked if there would be a big gap between when bond buying ended and when interest rate hikes started. “Such a long delay would not be necessary.”
Fed officials initially expected price increases to slow this year. Instead, the pressure has extended not only to goods affected by the pandemic, which have fallen victim to tangled supply chains, but also to rent and shelter. In those major categories, upward trends may prove more sustainable. Wages are rising, as are consumer inflation expectations, which may also cause price increases to continue.
The Fed has been watching the evidence piling up vigilantly, although most officials still hope inflation will decline towards their annual average of 2 percent as global shipping lanes clear backlogs, factory production increases to meet demand. and consumers are shifting to more normal spending patterns after scrambling to buy sofas, cars and exercise bikes during the pandemic.
But officials began not to help the economy all that much, announcing the original plan to slow their bond-buying program after their November meeting. Mr. Powell signaled late last month and early December that the central bank was increasingly focused on managing the risk that rapid price increases could continue – slowing the central bank’s shift.
“I think the risk of higher inflation has increased,” said Mr. Powell when he testified before Congress in late November.
The transition became official on Wednesday.
“They’re reviewing inflation, lowering unemployment, and as a result, pushing the path to interest rates,” Neil Dutta, head of US economics at Renaissance Macro, said in response to the news. “It’s a bit of a 180 on Powell’s part.”
Fed officials have also grown heart over the speed of the labor market recovery. The unemployment rate has fallen to 4.2 percent, a sharp drop from the double digit it reached at the start of the pandemic. Officials now expect the unemployment rate to fall to 3.5 percent by the end of next year — matching the very low level heading into the pandemic — their updated economic projections show.
“Job numbers have been solid in recent months and unemployment has fallen significantly,” the Fed said in its new policy statement.
Yet many people remain out of the labor market – some because they are retired, but others because of virus fear or a lack of childcare. That makes it more difficult to judge how close the economy is to the Fed’s goal of “maximizing employment.”
Mr Powell has sometimes suggested that full employment could be achieved next year, but he has also expressed uncertainty about that call.
“I think there’s room for a lot of humility here as we try to think about what maximum employment would be,” he said at a news conference in November.