Fed officials expect three rate rises next year

Federal Reserve officials expect to raise interest rates three times next year in a dramatic shift from their projections just three months ago as the US central bank assumes a much more aggressive approach to taming surging inflation.

The more hawkish interest rate forecasts were published alongside a plan to double the pace at which the Fed withdraws or “tapers” the massive bond-buying programme it put in place at the start of the pandemic. It will in January begin cutting purchases by $30 billion (€26.7 billion) a month so that the stimulus is removed several months earlier than initially expected.

That would put the Fed on track to stop adding to the size of its balance sheet by the end of March and give it leeway to raise rates soon thereafter.

At the end of its two-day policy meeting on Wednesday, the Federal Open Market Committee kept its main interest rate on hold at the rock-bottom range of 0 to 0.25 per cent, while signalling support for a more assertive approach to tightening policy.

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Interest rates

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 a “lift-off” in interest rates from today’s near-zero levels in 2022.

Now, three increases are expected in 2022, with three more rate rises pencilled in for 2023, followed by two in 2024.

The abrupt shift follows a string of robust economic data suggesting the labour market is recovering and that inflation is broadening out and at greater risk of becoming more entrenched.

The Fed also on Wednesday updated its economic projections, raising the forecast for core inflation – which is now running at 4.1 per cent and has not yet peaked – and lowering the estimate for the unemployment rate.

Core inflation

The median of Fed officials’ estimates now forecasts core inflation to rise to 4.4 per cent this year before dipping to 2.7 per cent in 2022, with the unemployment rate ending 2021 at 4.3 per cent and next year falling to 3.5 per cent.

Fed officials lowered their forecasts for economic growth, but still anticipate a healthy expansion this year and next. The US economy is set to grow 5.5 per cent in 2021, compared to 5.9 per cent in September, and another 4 per cent in 2022.

The decision reverberated through financial markets, as investors took the view that the Fed is serious about bringing rising inflation under control. Market measures of inflation over the next five years fell to the lowest level since October. – Copyright The Financial Times Limited 2021