The Federal Reserve is expected to announce a swifter scaling back of its enormous stimulus programme and boost its expectations for interest rate increases next year, as it takes a more assertive stance against surging inflation.
The US central bank on Wednesday is set to double the pace at which it is winding down or “tapering” its bond-buying programme, slashing its purchases by $30bn a month so that the stimulus ends altogether several months earlier than initially scheduled in November.
That would put the Fed on track to cease adding to the size of its balance sheet by the end of March and in a position to raise US rates soon after.
Fed officials are expected to signal their support for two rate increases next year, according to new projections to be released on Wednesday after its two-day policy meeting, a far more aggressive path than just a few months ago. Three or four more adjustments are set to be pencilled in for 2023, with another round in 2024.
When the so-called dot plot of individual interest rate projections was last updated in September, senior policymakers were evenly split on the prospects of lift-off from today’s near-zero levels in 2022.
The abrupt pivot follows a string of robust economic data that suggest a recovering labour market and mounting signs that inflation is not only broadening out, but also at greater risk of becoming more entrenched.
Jay Powell, the Fed chair, laid the groundwork for this move at congressional hearings several weeks ago, officially retiring the word “transitory” when talking about inflation and suggesting that stable prices are essential to a long economic expansion.
The Fed is expected to scrap the word entirely from its policy statement to be published on Wednesday and revise its language around the economic outlook.
Some economists believe the Fed will acknowledge that the inflation thresholds it sought to reach before raising interest rates may already have been met, given that core inflation is now running at 4.1 per cent and has not yet peaked.
The central bank has previously said it would keep rates tethered close to zero until it achieved inflation that averages 2 per cent for some time and maximum employment. The Fed has not set a numeric target for the latter goal, but the recent drop in the unemployment rate to 4.2 per cent suggests progress towards it.
The economic projections planned for Wednesday are also due for a revamp, with Fed officials likely to revise their forecasts for inflation upwards and cut their estimates for the unemployment rate.
In September the median forecast indicated that the core inflation measure would steady at 3.7 per cent this year before drifting lower to 2.3 per cent in 2022, while the unemployment rate would fall to 4.8 per cent in 2021 before slipping further the following year to 3.8 per cent.
Policymakers in September also saw the US economy expanding 5.9 per cent this year, before slipping to 3.8 per cent in 2022. Economists expect the 2021 figure to be shifted marginally lower.
Powell is also likely to address more directly the threat posed by the new Omicron variant, which has sparked global alarm and prompted many governments globally to reimpose lockdown measures.
The Fed chair has previously warned that Omicron presents “downside risks” to employment and economic activity and could exacerbate inflation as supply chain disruptions intensify further.
Source: Economy - ft.com
