Fed expects more rate hikes in 2022

Inflation spiked, prompting the Federal Reserve (Fed) to drastically reduce the economic stimulus package at the beginning of 2022 along with interest rate hikes.

Mr. Jerome Powell, Chairman of the US Federal Reserve (Fed). Photo: AFP

After the policy meeting on December 15, the Fed announced that it would end its economic stimulus package faster than initially expected, and its updated economic forecasts also left open that There will be more rate hikes in 2022.

Last month, the Fed announced a plan to reduce the size of the economic stimulus package by $15 billion. Specifically, the Fed said it would reduce purchases of Treasuries by $10 billion per month and reduce purchases of mortgage-backed securities (MBS) by $5 billion amid high inflation and the labor market. has been improved.

Previously, to cushion the impact of the Covid-19 pandemic on the economy and support recovery, the Fed has spent at least $120 billion on asset purchases every month since March 2020, of which 80 billion USD for Treasuries and $40 billion in mortgage-backed securities.

The Fed announced on December 15 that, starting January 1, 2022, it will cut its monthly purchases of Treasury bonds by $20 billion and monthly purchases of mortgage-backed securities by $10 billion.

Thus, the Fed will reduce the size of the economic stimulus package during the pandemic to 60 billion USD, of which 40 billion USD will buy treasury bonds and 20 billion USD will buy mortgage-backed securities each month. This is in line with what Fed Chairman Jerome Powell announced to the US Congress late last month.

From now until the end of the $120 billion stimulus package, the Fed has two policy meetings to consider adjusting the economic stimulus package in January and March 2022. However, in this statement, the Fed noted that it may adjust the pace of monthly asset purchases again, depending on the economic situation.

As for interest rate adjustments, in the December dot chart — a chart that Fed officials use quarterly to make short, medium, and long-term interest rate forecasts — Fed officials forecast predicts the prime interest rate will increase to 0.9% in 2022, 3 times the expected level in September 2021, and signaled additional interest rate hikes.

Investors and market participants predict that the Fed will likely have 3 rate hikes in 2022. According to CME FedWatch Tool – the Fed’s policy update site, the market is setting expectations. on the Fed’s rate hike in May 2022.

In this regard, at the press conference on December 15, the Fed Chairman affirmed that the rate hikes will take place gradually. At this point, the potential economic impact of the Omicron variant has not yet changed the Fed’s position.

Once interest rates are raised, the next challenge for the Fed will be to shrink its balance sheet. “We had our first discussion on the balance sheet” at this month’s meeting, Mr. Powell said.

As for inflation, Mr. Powell acknowledged that there is a real risk that inflation during the pandemic will last longer than initially expected.

Inflation in the US so far has not shown any signs of cooling down after record milestones. In the recent announcement of the US Department of Labor, the consumer price index (CPI) of the US in November increased by 0.8% compared to the previous month and increased by 6.8% over the same period last year. This is the fastest growth rate since June 1982.

However, the Fed’s preferred measure of inflation is not the CPI but personal consumption expenditure (PCE).

Explaining the move to cut this time, Mr. Powell said, “we put ourselves in a position” to deal with inflation. The Fed chair added that the agency is not an outsider when it comes to dealing with inflation. The Fed adjusted its policy immediately when it became clear that prices would continue to rise.