Fed ready to announce accelerated stimulus reduction

The Federal Reserve is expected to announce a faster downsizing of its massive stimulus program and boost expectations of rate hikes next year, as it takes a more assertive stance against rising inflation.

The US central bank on Wednesday is set to double the rate at which it is easing or “cutting” its bond-buying program, slashing purchases by $30 billion a month to stimulate ended completely a few months earlier than the original plan in November.

That will put raised is on track to stop growing its balance sheet by the end of March and is likely to appreciate the US rate shortly thereafter.

Fed officials are expected to signal support for two rate hikes next year, according to new projections to be released on Wednesday after a two-day policy meeting, a positive path. much more than just a few months ago. Three or four more adjustments will be made in 2023, with another round in 2024.

When the so-called dot plots of individual interest rate projections were last updated in September, senior policymakers Equally divided on the prospect of rising from near-zero today by 2022.

The sudden turn followed a string of strong economic data showing a recovering labor market and signs that inflation is not only expanding but is at risk of becoming more entrenched.

Jay Powell, the chairman of the Fed, placed communication for this move at congressional hearings a few weeks ago, officially dropped the word “transient” when talking about inflation and argued that stable prices were essential for economic expansion in the long run.

The Fed is expected to completely remove wording from its policy statement to be released on Wednesday and revise its language around the economic outlook.

Some economists believe the Fed will admit that the inflation thresholds it sought to hit before the rate hike may have been met, given that core inflation currently sits at 4.1 percent and has not peaked yet. .

The central bank has previously said it will keep interest rates near zero until it achieves an average 2% inflation for a while and maximum employment. The Fed did not set a numerical target for the latter, but recent decrease unemployment rate to 4.2% shows there is progress towards it.

Economic forecasts scheduled for Wednesday are also due to a reshuffle, with Fed officials likely to revise their forecasts for inflation upwards and cut their estimates for rates. unemployment rate.

In September, the median forecast indicated that the core inflation measure would stabilize at 3.7% this year before falling to 2.3% in 2022, while the unemployment rate would decline. 4.8% in 2021 before falling again the following year to 3.8%. coin.

Policymakers in September also saw American economy up 5.9% this year, before falling to 3.8% in 2022. Economists expect the 2021 figure to drop slightly.

Powell is also likely to more directly address the threat posed by the new variant of Omicron, which has sparked global alarm and prompted many governments globally to re-impose lockdown measures.

The Fed chair has previously warned that Omicron has “downside risks” to employment and economic activity and could exacerbate inflation as supply chain disruptions intensify.

https://www.ft.com/content/834e773c-0bf6-4510-87d3-123a5d040c05 Fed ready to announce accelerated stimulus reduction

Ian Walker

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