Fed doubles taper and signals three rate hikes for 2022 in inflation pivot

Federal Reserve officials have intensified their battle against the hottest inflation in a generation by shifting to an earlier end of their asset-buying program and signalling they favour raising interest rates in 2022 at a faster pace than economists were expecting.

Heralding one of the most hawkish policy pivots in years, the central bank said on Wednesday [Thursday morning AEDT] it will double the pace at which it’s scaling back purchases of US Treasuries and mortgage-backed securities to $US30 billion ($42 billion) a month, putting it on track to conclude the program in early 2022, rather than mid-year as initially planned.

Federal Reserve chairman Jerome Powell: The US central bank will double the pace of its taper.Credit:Bloomberg

The faster pullback puts Fed Chair Jerome Powell in a position to raise rates earlier than previously expected to counter price pressures if necessary, even as the pandemic poses an ongoing challenge to the economic recovery. The Fed flagged concerns over the new Omicron strain, saying that “risks to the economic outlook remain, including from new variants of the virus.”

Projections published alongside the statement showed officials expect three quarter-point increases in the benchmark federal funds rate will be appropriate next year, according to the median estimate, after holding borrowing costs near zero since March 2020.

That marks a major shift from the last time forecasts were updated in September, when the committee was evenly split on the need for any rate increases at all in 2022. The new projections also showed policy makers see another three increases as appropriate in 2023 and two more in 2024, bringing the funds rate to 2.1 per cent by the end of that year.

It marks a major shift from the last time forecasts were updated in September, when the committee was evenly split on the need for any rate increases at all in 2022.

The abrupt change in the taper pace reflects “inflation developments and the further improvement in the labour market,” the policy-setting Federal Open Market Committee said in a statement following a two-day meeting. The Fed reiterated that it “is prepared to adjust the pace of purchases if warranted by changes in the economic outlook.”

Employment goal

On interest rates, “With inflation having exceeded 2 per cent for some time, the committee expects it will be appropriate to maintain this target range until labour market conditions have reached levels consistent with the committee’s assessments of maximum employment.”

The FOMC vote was unanimous. Powell will hold a virtual post-meeting press conference at 2:30 pm Washington time [6:30am AEDT].

“Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation,” the FOMC said.

While the accelerated taper was in line with expectations from the majority of economists surveyed by Bloomberg News, the interest-rate path was steeper than what analysts had generally seen.

Investors had been expecting a rate hike by mid-year, according to trading in futures contracts, with some chance of a move as soon as March.


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