The Federal Reserve has signaled that it may start raising its benchmark interest rate sometime next year, earlier than it envisioned three months ago and a sign that it’s concerned that high inflation pressures may persist.
In a statement, the Fed also said following its most recent monetary policy-setting Federal Open Markets Committee meeting that it will likely begin slowing the pace of its monthly bond purchases “soon” if the economy keeps improving. The bond purchases have been intended to lower longer-term loan rates to encourage borrowing and spending.
Taken together, the Fed’s plans reflect its belief that the economy has recovered sufficiently from the pandemic recession for it to soon begin dialing back the extraordinary support it provided after the coronavirus paralyzed the economy 18 months ago. As the economy has steadily strengthened, inflation has also accelerated to a three-decade high, heightening the pressure on the Fed to pull back.
In its updated quarterly projections, Fed officials now expect to raise their key short-term rate once in 2022, three times in 2023 — one more than they had projected in June — and three times in 2024. That benchmark rate, which influences many consumer and business loans, has been pinned near zero since March 2020, when the pandemic erupted.
Before it starts raising rates, though, the Fed expects to begin paring, or tapering, its monthly bond buying. The central bank had signaled last year that it would likely start tapering its $120 billion-a-month in purchases of Treasurys and mortgage bonds once the economy had made “substantial further progress” toward the Fed’s goals of maximum employment and 2 percent average annual inflation.
“If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted,” the Fed said in a statement issued after its two-day meeting ended on Sept. 22.
Taken together, the Fed’s pullback in bond purchases and its eventual rate hikes, whenever they happen, will mean that some borrowers will have to pay more for mortgages, credit cards and business loans.
