Fed Paves The Way For Earlier Faster Interest Rate Hikes

In an effort to contain price increases that hit a 39-year high last month, the Fed on Wednesday agreed to clear the way for earlier and faster interest rate hikes in 2022 by accelerating the phase-out of its bond-buying stimulus.

The Fed’s policymaking committee left its benchmark rate near zero but now projects three rate hikes next year, up from one in its September forecast, according to officials’ median estimate. They foresee three more increases in 2023 and two in 2024. That would push the rate to 2.1% by the end of 2024.

The turnabout, which Fed Chair Jerome Powell signaled during congressional testimony late last month, came after consumer prices spiraled higher, reaching 6.8% annually in November, and the unemployment rate tumbled to 4.2% that same month. The latter development highlights widespread worker shortages that could intensify, driving up wages.

Just last month, the Federal Reserve was set on keeping its key interest rate near zero to boost the economy and help more Americans return to work after the COVID-19-induced recession.

Now, the Fed seems nearly as determined to raise the short-term rate to fight inflation. But the Fed faces a delicate balance as it aims to curtail inflation without disrupting the recovery. COVID spikes driven by the omicron variant are threatening to slow an economy that’s already set to cool next year.

The central bank lowers rates to spur more borrowing and economic activity and raises them to ward off inflation surges.