Fed Doubles Taper, Signals Three 2022 Hikes in Inflation Pivot

Federal Reserve officials intensified their battle against the hottest inflation in a generation by shifting to end their asset-buying program earlier and signaling they favor raising interest rates in 2022 at a faster pace than expected.

Heralding one of the most hawkish policy pivots in years, the central bank said Wednesday it will double the pace at which it’s scaling back purchases of Treasuries and mortgage-backed securities to $30 billion a month, putting it on track to conclude the program in early 2022, rather than mid-year as initially planned.

Projections published alongside the statement showed officials expect three quarter-point increases in the benchmark federal funds rate will be appropriate next year, according to the median estimate, after holding borrowing costs near zero since March 2020.

“Economic developments and changes in the outlook warrant this evolution of monetary policy,” Fed Chair Jerome Powell told reporters during a post-meeting press conference. “The economy has been making rapid progress toward maximum employment.”

The quicker pullback puts Powell in position to raise rates earlier than previously anticipated to counter price pressures if necessary, even as the pandemic poses an ongoing challenge to the economic recovery. The Fed flagged concerns over the new omicron strain, saying that “risks to the economic outlook remain, including from new variants of the virus.”

Powell said that policy makers eventually “expect a gradual rate of policy firming.” They don’t anticipate raising rates before ending the taper process, but could hike before reaching full employment, he added.

The new rate projections marks a major shift from the last time forecasts were updated in September, when officials were evenly split on the need for any rate increases at all in 2022. The new projections also showed policy makers see another three increases as appropriate in 2023 and two more in 2024, bringing the funds rate to 2.1% by the end of that year.

The abrupt change in the taper pace reflects “inflation developments and the further improvement in the labor market,” the policy-setting Federal Open Market Committee said in a statement following a two-day meeting. The Fed reiterated that it “is prepared to adjust the pace of purchases if warranted by changes in the economic outlook.”

“Economic activity is on track to expand at a robust pace this year,” Powell said, adding that “the economy has been making rapid progress toward maximum employment.”

The yield on 10-year Treasuries rose while the yield curve flattened sharply. Meanwhile the S&P 500 index advanced and the dollar pushed higher. Traders lifted the amount of Fed interest rate increases they see for 2022 up to about 73 basis points.

“You are seeing a bit more panic instead of patience within the ranks of the FOMC,” said Diane Swonk, chief economist at Grant Thornton LLP. “This is the first time we’ve seen the Federal Reserve chasing inflation in decades.”