Federal Reserve To Hike Interest Rates 3 Times in 2021

Starting 2022, the Federal Reserve will hike interest rates three times and increase the rate of its bond tapering efforts. The agency’s two-day meeting showed indications that the agency will abandon its easy monetary policy.

RELATED: 5 Factors Impacting Interest Rates!

Fed To Accelerate Bond Tapering

The Federal Reserve is signaling an end to the easy money policies adopted during the pandemic. The agency believes that the time to implement stricter policies is at hand.

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Rising inflation rates amid a supply chain squeeze are necessitating some aggressive action. 

One measure is the aggressive reduction of its bond purchases. From its original $120 billion budget for monthly bond purchases, the Fed cut its purchases by $15 billion in November.

Then, it will cut the purchases by $30 billion this month. However, by January next year, it will reduce its bond purchases by half and just use $60 billion a month.

The Fed estimates to wrap up its bond purchases by late winter or early spring. 

Fed To Hike Interest Rates Three Times In 2022

After completing its bond tapering, the Federal Reserve will then focus on raising interest rates. This means that consumers and borrowers will need to say goodbye to near-zero interest rates. 

Projections issued Wednesday show that the Fed foresees raising interest rates three times in 2022. Then, the agency will hike interest rates two more times in 2024. 

In his post-meeting conference, Fed Chairman Jerome Powell explains the decision. “Economic developments and changes in the outlook warrant this evolution of monetary policy, which will continue to provide appropriate support for the economy,” Powell said.

Federal Open Market Committee Approves Plan, Adjusts Inflation Forecast

For both policy approaches, the Federal Open Market Committee gave their unanimous approval. This formalizes the agency’s decision to move on from its loosest fiscal policy in 180 years.

In addition, the agency formally acknowledged the impact of inflation on the US economy. “Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation,” the statement said.

As a result, the committee drastically adjusted its inflation outlook for 202. From a 4.2% estimate, the committee now sees inflation for all items to move up to 5.3%.

For goods excluding food and energy, the panel sees inflation to run up to 4.4% instead of 3.7%. For 2022, the Fed expects inflation to rise to 2.6% for the headline and 2.7% for core items.

Meanwhile, projections for unemployment for 2021 went down from 4.8% in September to 4.3%. The agency credited solid job gains and declining unemployment. 

Hawkish Policy Moves

Unsurprisingly, many Fed officials began camping to the policy hawks camp as calls for raising interest rates to resonate. Six of the 18 FOMC members foresee fewer than three increases next year.

Meanwhile, nobody from the committee saw rates staying near zero. However, the agency also reaffirmed its commitment to retain the overnight borrowing rate to near zero.

They will do so “until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment.”

Finally, the FOMC also reduced its economic growth forecast for 2021. Instead of the 5.9% projections made in September, the Fed gave a smaller prediction of 5.5%.

For next year, it sees GDP growing by 4% instead of the earlier forecast of 3.8%. For 2023, they adjusted the outlook from 2.5% to 2.2%. 

Watch the Bloomberg Markets and Finance video reporting that the Federal Reserve won’t raise rates until the taper is finished:

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What do you think of the Fed’s decision to accelerate bond tapering? What do you also think about the Fed’s decision to raise interest rates beginning next year? Will these moves bring down inflation to manageable levels?

Let us know what you think. Share your comments below.

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