Fed Announces As Many as Three Interest Rate Hikes

Fed Announces As Many as Three Interest Rate Hikes

The era of near-free money may now be officially over.

The Federal Reserve may increase short-term rates as part of a strategy to slow inflation.

The Fed announced it is prepared to raise its short-term benchmark rate at least three times to cool high inflation.

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“As expected, officials also approved plans to more quickly scale back its pandemic stimulus efforts in response to hotter inflation, opening the door to rate increases starting next spring,” reports the Wall Street Journal. "Fed officials voted to hold rates near zero on Wednesday, but the latest projections are a significant shift from just three months ago. In September, around half of those officials thought rate increases wouldn’t be warranted until 2023, It is the latest sign of how an acceleration and broadening of inflationary pressures, together with signs of an ever-tighter labor market, is reshaping officials’ economic outlook and policy planning."

 

The Fed in a statement announced:

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have improved in recent months but continue to be affected by COVID-19. Job gains have been solid in recent months, and the unemployment rate has declined substantially. Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The path of the economy continues to depend on the course of the virus. Progress on vaccinations and an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation. Risks to the economic outlook remain, including from new variants of the virus.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent. With inflation having exceeded 2 percent for some time, the Committee expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment. 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. 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 Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook. The Federal Reserve's ongoing purchases and holdings of securities will continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.