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Fed to reduce pandemic support faster, three rate hikes expected in 2022

Dec 15, 2021

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Federal Reserve Chair Jerome Powell announced Wednesday the Fed will speed up the tapering of it pandemic-era support. The move came in response to rising inflation and falling unemployment.

“In light of inflation developments and the further improvement in the labor market, the committee decided to reduce the monthly pace of its net asset purchases by $20 billion for Treasury securities and $10 billion for agency mortgage-backed securities,” the Fed said in a statement. “Beginning in January, the committee will increase its holdings of Treasury securities by at least $40 billion per month and of agency mortgage‑backed securities by at least $20 billion per month.”

The Fed added it would likely end these purchases in March, which Powell said was a “few months sooner than we anticipated in early November” in a news conference Wednesday. The video above shows clips from the news conference.

Once the pandemic support is gone, the Fed can begin raising its benchmark rate. The Fed saiid it expects to raise that rate three times in 2022, up from the Fed’s projection of one rate raise back in September.

The Fed’s speeding up to taper pandemic-era support reflects its acknowledgement that inflation has persisted much longer than they expected. On Wednesday, the Fed predicted inflation will reach 5.3% by the end of the year, before falling to a 2.6% annual rate by the end of 2022.

“While the drivers of higher inflation have been predominantly connected to the dislocations caused by the pandemic, price increases have now spread to a broader range of goods and services,” Powell said. Those goods include food, energy and autos, and services including apartment rents, restaurant meals and hotel rooms. “Wages have also risen briskly, but thus far wage growth has not been a major contributor to the elevated levels of inflation.”

As for unemployment, it has fallen steadily since it reached its peak back in January.

“Job gains have been solid in recent months, averaging 378,000 per month over the last three months,” Powell said. “The unemployment rate has declined substantially, falling six tenths of a percentage point since our last meeting, and reaching 4.2% in November.”

The Fed predicts the unemployment rate falling to 3.5% by the end of next year, which would match pre-pandemic levels.

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Jerome Powell, Chairman of Federal Reserve: “Good afternoon. At the Federal Reserve, we are strongly committed to achieving the monetary policy goals that Congress has given us – maximum employment and price stability. Today in support of these goals, the Federal Open Market Committee kept interest rates near zero and updated its assessment of the progress that the economy has made toward the criteria specified in the committee’s forward guidance for interest rates. In addition, in light of the strengthening labor market and elevated inflation pressures, we decided to speed up the reductions in our asset purchases.”

“Economic activity is on track to expand at a robust pace this year, reflecting progress on vaccinations and the reopening of the economy. Aggregate demand remains very strong, buoyed by fiscal and monetary policy support and the healthy financial positions of households and businesses. The rise in COVID cases in recent weeks, along with the emergence of the omicron variant, pose a risk risks to the outlook.”

“While the drivers of higher inflation have been predominantly connected to the dislocations caused by the pandemic, price increases have now spread to a broader range of goods and services. Wages have also risen briskly, but thus far wage growth has not been a major contributed contributor to the elevated levels of inflation. We are attentive to the risks that persistent real wage growth in excess of productivity could put upward pressure on inflation.”

“At today’s meeting, the committee also decided to double the pace of reductions in its asset purchases. Beginning in mid-January. We will reduce the monthly pace of our net asset purchases by 20 billion dollars for Treasury securities and 10 billion dollars for agency mortgage backed securities. If the economy evolves broadly as expected, similar reductions in the pace of net asset purchases will likely be appropriate each month, implying that increases in our securities holdings would cease by mid-March, a few months sooner than we anticipated in early November. We are phasing out our purchases more rapidly because with elevated inflation pressures and a rapidly strengthening labor market, the economy no longer needs increasing amounts of policy support.”


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