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Fed doubles pace of tapering, warms up to rate hikes in 2022 as inflationary pressures rise

The Federal Reserve announced that it would move more quickly to pare back its pandemic-era easy money policies as Fed officials grow concerned about the persistence of inflationary pressures.

On Wednesday, the policy-setting Federal Open Market Committee said it would double the pace by which it winds down its asset purchase program.

The FOMC also signaled a strong likelihood of an interest rate hike next year, which would be the first since the central bank slashed short-term borrowing costs to near-zero in March 2020.

Since the depths of the pandemic, the Fed has added trillions of dollars in U.S. Treasuries and agency mortgage-backed securities to signal its support for financing conditions. The Fed had set a course in November to “taper” the pace of those aggregate purchases by $15 billion per month, and will now double that pace — to $30 billion per month.

“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 FOMC statement reads.

The new pacing would bring all asset purchases to a full stop by March 2022, faster than the course set forth in November that originally sought to end purchases by the middle of next year.

The decision was unanimously agreed to.

A quicker taper would allow the Fed to move earlier — and perhaps more aggressively — on interest rate hikes. All of the 18 members of the FOMC said they could see the case for at least one rate hike next year, a noticeable revision up from September projections showing a 50-50 split on a 2022 rate hike.

The updated dot plots, which map out each of the FOMC members’ projections for where rates will be in coming years, shows the median member of the committee projecting three rate hikes next year, another three in 2023, and another two in 2024.

Those projections suggest a more aggressive rate hike path than the last round of dot plots in September, likely rooted in FOMC members’ growing concerns over inflation.

“Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to elevated levels of inflation,” the FOMC statement said.

The median member of the committee sees personal consumption expenditures, the Fed’s preferred measure of inflation, clocking in at 2.6% in 2022 (compared to 2.2% in the Fed’s September projections).

Raising rates (and thus, borrowing costs) could have the effect of dampening underlying demand in the economy.

The Fed may also feel more comfortable raising rates given progress in the labor market, where November jobs data showed the headline unemployment rate falling to 4.2%. The Fed now sees the unemployment rate ending 2022 at 3.5%, a sharp improvement over the Fed’s September projection of 3.8%.

The FOMC statement says Omicron and other new variants remain risks to the economic outlook.

The next FOMC meeting is scheduled to take place Jan. 25 and 26.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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