The US Federal Reserve, stung by persistently high inflation and encouraged by lower-than-expected unemployment, is set on Wednesday to chart a path of higher interest rates next year as policymakers show their hands on just how soon and how much they think borrowing costs will need to increase to keep the economy on an even keel.
Fed Chair Jerome Powell has already flagged the rate-setting committee will likely announce at its policy meeting this week that it will accelerate the end of its bond-buying program, wrapping it up by March instead of June, in order to clear the way for the Fed to lift off interest rates from near zero, where they have been held since March 2020 when the coronavirus pandemic triggered a short but deep recession.
The sharp turn in rhetoric as the central bank plots its course out of emergency era measures reflects the depth of unease over how the COVID-19 pandemic has juiced demand, played havoc with supply chains and led to broader and more persistent inflation that risks becoming embedded in business and consumer expectations.
It will lead to policymakers’ bringing forward their projections for interest rate rises, in their so-called “dot plot,” as part of their forecasts, released quarterly, for economic growth, employment and inflation as well as the timing of interest rate rises.
“The Fed needs to be a bit more aggressive with removing accommodation than they have been,” said Tim Duy, chief US economist at SGH Macro Advisors, who expects officials to revise their median forecast to two rate hikes next year to rein in inflation levels, from a split at their last meeting on if they even needed one.
Most analysts expect the Fed to stick to forecasting three rate hikes in 2023 and 2024, given officials still expect a rapid abatement of price pressures in the latter half of next year as the pandemic recedes from view.
