Federal Reserve Chairman Jerome Powell spoke at a Senate Banking Commission hearing on Tuesday, November 30, 2021 at Capitol Hill, Washington. (AP Photo / Andrew Harnik)
Washington (AP) — The Federal Reserve expects to accelerate the pace of withdrawing support for the post-pandemic US economy as inflation soars, trebling interest rates three times next year.
With a sudden policy shift, the Fed announced on Wednesday that it could double its monthly bond purchases at a previously announced pace and close it altogether in March. Bond purchases were aimed at holding down long-term interest rates to support the economy, but they are no longer needed as unemployment rates fall and inflation is at high levels for nearly 40 years. With the accelerated schedule, the Fed is on the road to starting rate hikes early next year.
The Fed’s new forecast to triple benchmark short-term interest rates next year is up from the one rate hike predicted in September. The Fed’s key interest rates, which are currently fixed near zero, will affect many consumer and corporate loans, which could rise as well.
Policy changes announced by the Fed in a statement after the Fed’s latest meeting was signaled in a testimony submitted to Congress two weeks ago by Chair Jerome Powell. This change has shown Powell’s perception that the Fed needs to start tightening consumer and corporate credit faster than it thought just a few weeks ago amid rising inflationary pressures. The Federal Reserve has previously characterized inflation surges as a predominantly “temporary” problem that will decline as supply bottlenecks caused by pandemics are resolved.
However, price increases have continued longer than federal expectations, ranging from goods such as food, energy and cars to services such as apartment rent, restaurant meals and hotel rooms. It weighs heavily on consumers, especially low-income households, especially daily necessities, counteracting the higher wages many workers receive.
In response, the Fed is paying attention to curbing higher prices, dropping from 4.8% at the previous meeting to 4.2% due to lower unemployment. According to the government, consumer prices rose 6.8% year-on-year in November, the fastest pace in nearly 40 years.
The Fed’s new policy shift carries risks. Raising borrowing costs too quickly can curb consumer and corporate spending. As a result, the economy can be weakened and the unemployment rate can rise.
But if the Fed waits too long to raise rates, inflation can run wild. You may then have to act aggressively to tighten credit and potentially cause another recession.
The Federal Reserve said it expects inflation to cool by the second half of next year. Gasoline prices are already below their peak. Supply chain bottlenecks in some regions are gradually mitigating. And the government’s stimulus payments, which spurred a surge in spending that boosted inflation, are unlikely to come back.
However, many economists expect high prices to continue. That possibility was reinforced this week by government reports that wholesale inflation surged 9.6% in the 12 months to November. This is the fastest pace of the year-on-year record up to 2010.
Housing costs, such as apartment rents and home ownership costs, which account for about one-third of the consumer price index, have risen at an annual rate of 5% in recent months, according to Goldman Sachs economists. Restaurant prices in November rose 5.8% from a year ago, hitting a nearly 40-year high, partly reflecting rising wage costs. Such a rise could sustain inflation well above the Fed’s annual target of 2% next year.
The Fed tightens credit faster and sees three rate hikes in 2022 | WGN Radio 720
Source link The Fed tightens credit faster and sees three rate hikes in 2022 | WGN Radio 720
The post The Fed tightens credit faster and sees three rate hikes in 2022 | WGN Radio 720 appeared first on Illinois News Today.
No comments:
Post a Comment