USA: Fed plans three rate hikes in 2022 to stem inflation, markets news

by Howard Schneider

WASHINGTON, Dec.15 (Reuters) – The US Federal Reserve (Fed) on Wednesday announced it would end its bond purchases in the markets in March and paved the way for three quarter-point hikes in its interest rates by the end of 2022, which will mark the end of the support policy implemented in the face of the COVID-19 pandemic.

Its new economic projections forecast inflation of 2.6% next year, against 2.2% expected in September, and a drop in the unemployment rate to 3.5%, a level close to or even lower than that corresponding to full employment. .

On this basis, the median of the forecasts of its managers suggests a rise in the target rate for federal funds (“fed funds”), currently almost zero, to 0.9% by the end of 2022 then to 1.6 % in 2023 and 2.1% in 2024, a level close to but never higher than that which could slow down economic activity.

“The economy no longer needs increased monetary policy support,” Fed Chairman Jerome Powell said at a press conference after the Federal Open Market Committee (FOMC) meeting. “From my perspective, we are making rapid progress towards full employment.”

The scenario outlined by the central bank corresponds in fact to the soft landing that it is trying to promote, with, over the next few years, a gradual decline in inflation in an economy in regular growth and the maintenance of ‘low unemployment.

The timing of the upcoming rise in interest rates, the Fed explains in the press release issued after two days of debates on monetary policy, will now depend solely on the labor market, which is expected to continue to grow. improve over the coming months.

The press release no longer mentions the “temporary” nature of inflation, but notes on the contrary that the rise in prices has exceeded its target of 2% for “some time”.

COMMITTED STANDARDIZATION

As a prelude to the rate hike, the Fed will reduce its purchases of Treasury bills and securitized real estate loans (MBS) twice as fast as today, which will lead to a total halt in March of these purchases, which still represented before the fall 120 billion dollars per month.

Wall Street amplified its rise after these announcements and Jerome Powell’s press conference: a few minutes before the markets closed, the Standard & Poor’s 500 index gained more than 1.2%.

At the same time, the dollar lost ground against other major currencies and the yield on two-year government bonds, the most sensitive to expectations of interest rates, was virtually unchanged at 0.665%.

The evolution of the futures markets also shows that traders are now anticipating a first rate hike in May and two more by the end of 2022.

“The Fed is ‘hawk’ but no more than expected,” commented Gregory Daco, chief US economist at Oxford Economics. “It gives the impression that it is really prioritizing inflation and putting itself in a position to be able to raise rates in the months to come.”

The press release and the new Fed forecasts https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20210922.pdf confirm that the central bank is now fully engaged in the normalization of its monetary policy after the exceptional measures implemented since March 2020 to support the economy in the face of the impact of the health crisis.

While the unemployment rate in the United States continued to fall in November to return to 4.2%, the lowest since February 2020, inflation accelerated further to reach 6.8% on an annual basis, its pace highest since 1982.

Despite the uncertainty created by the outbreak of the Omicron variant of the coronavirus, the Fed is forecasting economic growth of 4.0% next year, 0.2 percentage point higher than expected in September.

(Howard Schneider report, with Jonnelle Marte, French version Marc Angrand, edited by Jean Terzian)

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