Fed Gets Hawkish; Doubles Taper, Signals Three Rate Hikes in 2022

The US Federal Reserve plans to speed up its asset purchase tapering timeline in response to high inflation and an improved labor market

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Jerome Powell, chair, Federal Reserve, Blockworks Exclusive Art by Axel Rangel

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key takeaways

  • The Fed will cut bond purchases by twice as previously suggested
  • The hawkish turn is due to improvements in the labor market and growing concerns over inflation

In one of the most hawkish moves in recent history, the Federal Reserve will speed up its asset purchase tapering timeline in response to high inflation and an improved labor market, a policy statement from the central bank revealed Wednesday.   

Policymakers have elected to cut bond purchases by twice as much as previously announced. If this new tapering pace is maintained, the pandemic-era program that saw the central bank purchase assets at a rate of $120 billion a month will end in March 2022.

“We are phasing out our purchases more rapidly because with elevated inflation pressures and a rapidly strengthening labor market, the economy no longer needs increasing amounts of policy support,” Fed Chairman Jerome Powell said during a press conference Wednesday following the conclusion of the two-day Federal Open Market Committee (FOMC) meeting. 

Inflation has exceeded the Fed’s target of 2% “for some time,” the policy statement noted. Consumer prices rose 6.4% over the year in November, marking the fastest increase in decades. The FOMC revised its median projection for 2022 inflation to 2.6%, up from 2.2% in September. 

“We are committed to our price stability goal,” Powell said. “We will use our tools both to support the economy and a strong labor market, and to prevent higher inflation from becoming entrenched.”  

The new taper timeline positions the central bank to raise interest rates earlier than expected if inflation persists. 

Economic projections released with the statement show that Fed officials anticipate three increases of a quarter-point each to the benchmark federal funds rate in 2022. Forecasts from September showed that half of Fed officials saw no need for rate increases at all in 2022. Interest rates have been kept near-zero since March 2020. 

When asked about long and variable lags, a common concern about the delay between policy changes and impact on the economy and real-world prices, Powell was unconcerned. 

“I do think that in this world where everything is new, and the global financial markets are connected together, financial conditions can change very quickly,” he said. “When we communicate about what we’re going to do, the markets move immediately to that.”

Equities and digital asset markets reacted positively to the news. The S&P 500 and Nasdaq were both up about a quarter of a percent as of 2:48 pm EST. Bitcoin and ethereum also ralled, up 3.5% and 4.6%, respectively.


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