The Economy

Fed Shifts Toward Rate Hikes Next Year

The Fed's decision to speed up the tapering of its massive bond-buying program "says something about [its] desire to raise rates."
Matthew HellerDecember 16, 2021

The U.S. Federal Reserve signaled Wednesday it is preparing to raise interest rates as it shifts toward easing inflationary pressures in the economy.

After a two-day meeting, the Fed’s policy-making committee said the central bank was “committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.”

Citing inflation developments and the further improvement in the labor market, the committee decided to reduce the monthly pace of its massive bond-buying program by $20 billion for Treasury securities and $10 billion for agency mortgage-backed securities, which would mean ending the program by March 2022 instead of June.

The Fed has made clear it wants to end the bond-buying, a form of economic stimulus, before it raises interest rates. On Wednesday, it projected at least three quarter-percentage-point rate increases next year after keeping rates at zero since the pandemic began in March 2020.

“A decision to taper faster says something about your desire to raise rates,” Michael Gapen, chief U.S. economist at Barclays, told The Wall Street Journal. “There is no reason to taper faster unless you want to get to rate hikes sooner.”

Fed officials had played down concerns over inflation, suggesting the spike was a temporary phenomenon related to pandemic-driven supply constraints. But according to the Journal, “an acceleration and broadening of inflationary pressures, together with signs of an ever-tighter labor market, have reshaped officials’ economic outlook and policy planning.”

“There’s a real risk now, I believe, that inflation may be more persistent and … the risk of higher inflation becoming entrenched has increased,” Fed Chair Jerome Powell said at a news conference Wednesday. “That’s part of the reason behind our move today, is to put ourselves in a position to be able to deal with that risk.”

Powell said his shift began after Labor Day, as the job market showed signs of strengthening and inflation readings remained elevated.

Consumer prices climbed 6.8% percent in November from a year earlier, the quickest pace of increase since 1982, and the Fed’s preferred inflation gauge rose 4.1% in October, well above its 2% target.