Fed to speed tapering of bond purchases; hike rates three times in 2022
The Federal Reserve will boost the tapering pace of its monthly bond buys, doubling it in January and continuing that pace in 2022, citing inflation and improvements in the jobs market as factors, according to the post-meeting statement issued at the conclusion of the Federal Open Market Committee (FOMC) meeting.
“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,” the post-meeting statement said. “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.”
While noting that “similar reductions in the pace of net asset purchases will likely be appropriate each month,” the Fed signaled it would adjust the pace “if warranted by changes in the economic outlook.”
The post-meeting statement was silent on the prospects for beginning to sell off any of the Fed’s portfolio nor was there any explicit mention of interest rate increases ahead. The statement simply said, “The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.”
However, updated forecasts from Fed members provided the signals on tightening of U.S. monetary policy.
Majority now see three rate hikes in 2022
There was no increase in the target range for the Fed funds rate announced at the conclusion of the meeting as was widely expected. But in 2022, updated Fed forecasts paint a different picture. All FOMC members expect at least one rate increase in 2022, with five expecting two and 10 expecting three increases by the end of the year. And, two members indicated they expect four increases in the target range for the Fed funds rate which would leave it at 1% to 1.25% compared with the current zero to 0.25% mark.
And still-more increases are expected in 2023, with a wider range of expectations. The outlook in 2023 ranges from the target range of the Fed funds rate to be at 1% to 1.25% (two members), 1.25% to 1.5% (five members), 1.5% to 1.75% (three members), 1.75% to 2% (five members) and three expect the range to be from 2% to 2.25%.
FOMC members have downgraded their expectations for GDP in 2021, now expecting it at 5.5%, down from 5.9% in September. But they increased their expectations for the US economy in 2022 with a 4.0% GDP mark, up from 3.8% in September. But 2023 is likely to see slightly less growth than previously—now expected to be 2.2% versus 2.5% in September.
Inflation expectations are also lofty, with the core Personal Consumption Expenditures (PCE) at 4.4% this month for 2021, up from 3.7% in September. But inflation is seen moderating in 2022 to a core PCE rate of 2.2% (2.7% in September) and remaining at 2.2% for 2023 (2.3% in September).
Clearly this is a Fed that has changed course in an attempt to head off as much negative implications from inflation as possible for the U.S. economy.