Fed Projects Rate Hike May Come as Soon as 2022

Federal Reserve also hints at tapering Fed’s bond-buying program ‘soon’

Jerome Powell smiling

Win McNamee/Getty Images

The era of ultra-low interest rates may end sooner than the Federal Reserve had anticipated in June, according to projections released Wednesday at the close of a two-day meeting of the Fed’s policy-making arm.

Half of the Federal Open Market Committee’s 18 members, up from seven at the committee’s last meeting in June, forecast a rise in the benchmark fed funds rate by the end of 2022, pushing the median forecast into next year. In June, most members had predicted rate hikes starting in 2023. With the economy and employment continuing to strengthen, the committee also inched closer to announcing that it would begin trimming its asset purchases.  Most economists expect the Fed to formally announce a tapering of those purchases of Treasury securities and mortgage-backed securities at its next meeting in November.

When the pandemic hit last year, the central bank took extraordinary measures to support the economy by slashing its benchmark rate to near zero, and embarking on a massive monthly bond-buying program to keep money flowing through the economy. (Low interest rates make it cheaper for consumers and businesses to borrow money, and the Fed’s bond buying helps keep longer-term rates low and cash flowing into the financial system.) Now, after more than a year of monetary support, the economy is showing some of what the Fed calls “substantial further progress” toward its goals of maximum employment and inflation averaging 2% over the long run.

“If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted,” the Fed said in a statement Wednesday. At a press conference following the committee meeting, Fed Chairman Jerome Powell said inflation has met the Fed’s target—in August, CPI rose 5.3% over the last 12 months—but that some members wanted to see more improvement in the job market. Unemployment last month was at 5.2%, well above the 3.5% rate before the pandemic in February 2020. Job gains in August were slowed by the fast-spreading delta variant.

Powell said that by his estimation, however, the labor market “has all but met” the substantial further progress test, so he wouldn’t have to see a knockout job report in September to be convinced to start tapering the bond-buying program this year. If the committee decides at its November meeting to begin tapering later this year, he estimated the taper would finish by mid-2022. However, he emphasized again that would not mean interest rate hikes would immediately follow, noting that the timing of rate increases requires a “different and substantially more stringent test.”

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Article Sources

  1. Federal Open Market Committee. “Summary of Economic Projections,” Page 4.

  2. ING. “Federal Reserve Preview: A Nod to November.”

  3. Federal Reserve. “Federal Reserve Issues FOMC Statement (March 15, 2020).”

  4. YouTube. “Fed Chair Powell Holds Press Conference On Economic And Interest Rate Forecasts.” Sept. 22, 2021.” (Video, 30 minutes in.)

  5. YouTube. “Fed Chair Powell Holds Press Conference On Economic And Interest Rate Forecasts.” Sept. 22, 2021.” (Video, 27 minutes in.)