On Wednesday, the Federal Reserve announced that its inflation target has apparently been met, which means that it will terminate its bond purchases that occurred during the pandemic, thereby paving the way for increasing interest rates by three different quarter-percentage point interest rate increases by the end of 2022.
The three interest rate increases constitute part of the Fed’s plan to exit policies created during the COVID pandemic.
The Fed also released new economic projections after a two-day meeting on policy, with officials forecasting inflation to run at upwards of 2.6 percent next year, which contrasts with the 2.2 percent increase that had been projected in September. In addition, the unemployment rate is anticipated to decrease to 3.5 percent, which approximates full employment.
Consequently, officials at the Federal Reserve believe that the benchmark overnight interest rate needs to increase from its current level of nearly zero to 0.90 percent by the end of 2022. This increase would lead to an interest rate hiking cycle, which would include interest rates of 1.6 percent in 2023 and 2.1 percent in 2024. These interest rates would near, though ostensibly not exceed, interest rate levels that are known for restricting economic activities.
The Fed claims that its plan constitutes a “soft landing” into interest rate increases, which will purportedly reduce inflation pressures in the coming years while unemployment levels remain lower across an expanding economy.
The first hike in 2021 will depend entirely on the trajectory of the nation’s job market, which is anticipated to continue improving in the next several months.
The Fed also removed all references to “transitory” inflation, noting that price increases had swelled beyond the standard 2 percent target for quite “some time.”
In the past several months, inflation has been increasing at levels more than double the Federal Reserve’s target.
In order to begin hiking rates, the Fed declared that it would double the speed of its bond-purchasing “taper,” which puts the Fed on track for terminating the program by March.
After the Fed made its announcement, U.S. stocks observed modest gains while yields on Treasury securities experienced increases as well. In addition, the dollar also became stronger against the currencies of multiple trading partners.
As a result of the new plan, the Fed hopes to achieve 4 percent economic growth rate in the following year, which is a 0.2 percent increase from September projections. Moreover, a 4 percent economic growth rate is presently more than double the current underlying trends of the national economy.
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