Source: Reuters | Editor: Herlina Kartika Dewi
KONTAN.CO.ID – WASHINGTON. The Federal Reserve said it will end its pandemic-era bond buying in March as its inflation target has been met, and pave the way for a three-quarter percentage point increase in interest rates by the end of 2022 in line with the end of policies imposed at the start of the health crisis.
quote Reuters, Thursday (16/12), in new economic projections released after the end of a two-day policy meeting, officials forecast that inflation will hit 2.6% next year, compared with 2.2% projected in September, and the unemployment rate will drop to 3.5% – close to or exceed full employment.
As a result, officials project the US central bank’s benchmark interest rate will need to rise from its current near zero level to 0.90% by the end of 2022.
That would kick off an upward cycle that would see the Fed’s policy rate rise to 1.6% in 2023 and 2.1% in 2024 – close to but never exceed levels that would be considered limiting economic activity.
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“The economy no longer needs an increased amount of policy support,” Fed Governor Jerome Powell said in a press conference after the meeting.
“In my view, we are making rapid progress toward maximum employment.”
The scenario set by the Fed is, broadly speaking, the smooth landing its officials hope will happen, with inflation gradually easing in the coming years while unemployment remains low in a growing economy.
The timing of the first hikes in 2022, the central bank said, will now depend only on the path of the job market which is expected to continue to improve in the coming months.
Dropping from the latest policy statement is any reference to inflation is temporary, the Fed instead admits that price increases have been topping their 2% target “for some time.”
Annual inflation has run more than double the Fed’s target in recent months.
To open the door for rate hikes, the Fed announced it would double the pace of taper bond purchases, putting it on track to end purchases of Treasuries and mortgage-backed securities (MBS) in March.
Until recently, the central bank had been buying $120 billion in Treasuries and MBS every month to help fuel the economic recovery.
US stocks closed sharply higher, while treasury yields also rose. The dollar initially strengthened after the release of the Fed’s statement and projections before finally correcting and trading lower against major currencies.
Futures traders expect a first rate hike in May and a second by the end of 2022.
