Federal Reserve warns interest rate rises are coming in 2022 – a year earlier than it projected – but plays down inflation fears and claims rising cost of living is ‘transitory’
The Federal Reserve is holding steady on its benchmark interest rate, again calling high inflation rates transitory, but says that it may raise rates next year, earlier than anticipated.
‘Inflation is elevated, largely reflecting transitory factors,’ the Federal Open Market Committee said in a statement on Wednesday saying that it would keep its benchmark rate near zero.
The new statement signaled that the Fed may start raising its 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.
The Fed also said it will likely begin slowing the pace of its $120 billion in monthly bond purchases later this year if the economy keeps improving.
The purchases of Treasury bonds and mortgage-backed securities have been intended to encourage borrowing and spending — but they have also flooded the market with money, concerning .
Fed Chairman Jerome Powell is seen in a file photo. The Federal Reserve is holding steady on its benchmark interest rate, insisting inflation is transitory
The famous ‘dot plot’ shows Fed policymakers’ projections on when interest rates will increase. The median forecast has moved up to 2022 for the first rate hike
Nine of 18 U.S. central bank policymakers projecting borrowing costs will need to rise in 2022, an accelerated timeline from the last policy meeting.
In projections included in the release, policymakers forecasted inflation at 4.2 percent for the year, more than double the Fed’s target rate.
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.
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 is thought to be growing at a solid 4 percent annual rate in the current July-September quarter.
At the same time, inflation has surged as resurgent 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 percent in July from a year ago – the sharpest such increase since 1991.
The PCE Index (blue) and CPI Index (red) are the two key measures of US inflation
For the 12 months through July, the consumer price index rose 5.4 percent
Though acknowledging the new surge of the pandemic had slowed the recovery of some parts of the economy, overall indicators ‘have continued to strengthen,’ the Fed said in a unanimous statement.
If that progress continues ‘broadly as expected, the Committee judges that a moderation in the pacer of asset purchases may soon be warranted,’ the Fed said.
The statement had been widely expected to signal that the Fed would soon begin winding down the $120 billion in monthly bond purchases it has been making to blunt the economic impact of the coronavirus pandemic.
But it was in their broader economic outlook that Fed policymakers made a less anticipated change.
The outlook for inflation jumped 0.8 percentage point for 2021 to 4.2 percent and the unemployment rate seen at the end of this year rose.
In turn, two officials brought forward into 2022 their projected timeline for slightly lifting the Fed’s benchmark overnight interest rate from the current near-zero level, enough to lift the median projection to 0.3 percent for next year.
Developing story, more to follow.