The Federal Reserve is expected to announce a faster reduction in its huge stimulus program and raise its expectations about raising interest rates next year, as it takes a stronger stance against rising inflation.
The US Federal Reserve on Wednesday should double the pace at which it cancels or “narrows” its bond-buying program, reducing its purchases by $ 30 billion a month, so that the stimulus is fully completed a few months before the original scheduled in November.
That would bet Fed on its way to stop raising its balance sheet by the end of March and in a position to raise US rates soon after.
Fed officials are expected to signal their support for two rate increases next year, according to new projections to be released Wednesday after a two-day policy meeting, a far more aggressive path than just a few months ago. Three or four more adjustments are planned for 2023, and the second round in 2024.
When the so-called chart of individual interest rate projections was last updated in September, senior policymakers were evenly divided on the prospects for withdrawal from today’s levels close to zero in 2022.
The a sharp turn followed by a series of solid economic data pointing to a labor market recovery and growing signs that inflation is not only spreading, but is also at greater risk of becoming more entrenched.
Jay Powell, president of the Fed, passed foundations for this move at congressional hearings a few weeks ago, officially withdrawing the word “transitional” when talking about inflation and suggesting that stable prices are essential for long-term economic expansion.
The Fed is expected to completely remove that word from its policy statement, which will be released on Wednesday, and revise its language in line with the economic outlook.
Some economists believe the Fed will admit that the inflation thresholds it wanted to reach before interest rates rose may have already been reached, given that core inflation is now 4.1 percent and has not yet peaked.
The central bank said earlier that it would keep rates tied close to zero until it achieves inflation that averages 2 percent for some time and maximum employment. The Fed did not set a numerical target for the latter target, but recent decline at an unemployment rate of 4.2 percent indicates progress towards it.
Economic projections planned for Wednesday should also be revised, and Fed officials are likely to revise their inflation forecasts upwards and reduce their estimates of the unemployment rate.
In September, the median forecast showed that core inflation would stay at 3.7 percent this year before falling to 2.3 percent in 2022, while the unemployment rate will fall to 4.8 percent in 2021 before which slips an additional 3.8 percent cents next year.
Policymakers in September also saw it the American economy it rose 5.9 percent this year, before slipping to 3.8 percent in 2022. Economists expect the figure for 2021 to move slightly lower.
Powell is also likely to address more directly the threat posed by the new variant of Omicron, which has sparked global alarm and prompted many governments globally to reintroduce isolation measures.
The Fed chairman had earlier warned that Omicron posed a “bad risk” to employment and economic activity and could exacerbate inflation as supply chain disruptions intensify.