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  • Fed aims for an early end of tapering by March next year and plans rate hikes over three occasions
    2021-12-22 hit 697

    Fed aims for an early end of tapering by March next year and plans rate hikes over three occasions.

    The pace of tapering expected to double to $30 billion per month

     

    Tapering expected to end in March and interest rate hikes to take place subsequently over three occasions

    Rate hikes of up to 2.1% prospected by the end of 2024

     

    The Federal Reserve announced that it would shift to an earlier end of their asset-buying program initiated during the Covid pandemic-era as Fed officials grow concerned about the persistence of inflationary pressures. This signals a strong likelihood of an interest rate hike next year much earlier than initially planned. The Fed said it reached to an agreement during the two-day Federal Open Market Committee (FOMC) meeting to double the pace at which it is scaling back purchases of Treasuries and mortgage-backed securities (tapering) to $30 billion a month from $15 billion per month. Scaling back purchases of Treasuries and mortgage-backed securities much more than planned puts it on track to conclude the economic stimulus program in March 2022.


    Officials expect three increases in the benchmark federal funds rate will be appropriate next year while maintaining near-zero rates until the end of the year, which has been ongoing since March last year. That marks a major shift from the last time forecasts were updated in September, when the committee was split on the need for any rate increases at all in 2022. Fed officials project to see another three increases as appropriate in 2023 and two more in 2024, bringing the funds rate to 2.1% by the end of that year.


    It is reportedly known that the Fed expected rate hikes for next year by citing a separately released point chart. Out of a total of 18 FOMC members, 10 members expect hikes between 0.88 and 1.12% and five members expect hikes between 0.63 and 0.87%. A Fed official stated, “With inflation having exceeded 2% for some time, FOMC expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with FOMC’s assessments of maximum employment.” The unemployment rate in the U.S. saw a sharp decrease to 4.2% in November from the peak 14.8% rate reached in April 2020.


    While the accelerated taper was in line with expectations by a vast majority of economists, the interest-rate path was steeper than what analysts had seen. The Fed also expressed concern arising from the Omicron variant. Analysts also assessed, “Ricks factors, including the Omicron variant, still remain, which can affect economic forecasts.” The Fed decided to initiate tapering on November 3rd after the FOMC meeting held on that day. It announced reductions of $15 billion each month from the current $120 billion in monthly asset purchases that the Fed is buying since the outbreak of the Covid Pandemic.


    Opinions forecasting a short-lived, temporary high inflation were dominant until last month. However, Fed Chair Jerome Powell told lawmakers during a Senators’ meeting last month that it was time to “retire” the Fed’s description of high inflation as “transitory,” and signalled a possibility of an earlier-than-expected end of tapering. Consumer prices rose 6.8% in the year through November, marking the fastest pace of increase in four decades. Concern over a faster increase of consumer prices is mounting, fuelled by rising raw material prices and salary increases, which may further accelerate increases in consumer prices.

     

    [This news is provided by Newsis]

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