Fed will aggressively dial back its bond buying, sees three rate hikes next year
The Federal Reserve provided multiple indications Wednesday that its run of ultra-easy policy since the beginning of the Covid pandemic is coming to a close, making aggressive policy moves in response to rising inflation.
For one, the central bank said it will accelerate the reduction of its monthly bond purchases.
The Fed will be buying $60 billion of bonds each month starting in January, half the level prior to the November taper and $30 billion less than it had been buying in December. The Fed was tapering by $15 billion a month in November, doubled that in December, then will accelerate the reduction further come 2022.
After that wraps up, in late winter or early spring, the central bank expects to start raising interest rates, which were held steady at this week’s meeting.
Projections released Wednesday indicate that Fed officials see as many as three rate hikes coming in 2022, with two in the following year and two more in 2024.
The committee sharply ratcheted up its inflation outlook for 2021, pushing it to 5.3% from 4.2% for all items and to 4.4% from 3.7% excluding food and energy. For 2022, the expectation is now 2.6% for headline and 2.7% for core, both up from September.
At the same time, the unemployment rate projection for 2021 came down to 4.3% from 4.8% in September.
The statement noted that “job gains have been solid in recent months, and the unemployment rate has declined substantially.”
However, members came out on the hawkish side of policy moves, with members solidly leaning toward rate hikes. The “dot plot” of individual members rate expectations indicated that just six of the 18 FOMC members saw fewer than three increases next year, and no members saw rates staying where they are now, anchored near zero.
The committee reduced its forecast for economic growth this year, seeing GDP rising 5.5% for 2021, compared with the 5.9% indicated in September. Officials also revised their forecasts in subsequent year, raising 2022 growth to 4% from 3.8% and lowering 2023 to 2.2% from 2.5%.
The statement again noted that developments with the Covid pandemic, in particular with variants, pose risks to the outlook.
Inflation hotter than expected
Both policy moves came in response to escalating inflation, which is running at its highest level in 39 years for consumer prices. Wholesale prices in November jumped 9.6%, the fastest on record in a sign that inflation pressures are becoming more ingrained and broad based.
The asset purchase taper began in November, with a reduction of $10 billion in Treasury purchases and $5 billion in mortgage-backed securities. That still left the month buys at $70 billion and $35 billion, respectively.
However, the Fed’s $8.7 trillion balance sheet increased by just $2 billion over the past four weeks, with Treasury holdings up $52 billion and MBS actually reduced by $23 billion. Over the past 12 months, Treasury holdings have expanded by $978 billion while MBS has risen by $567 billion.
Reference: CNBC
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