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Interest Rates Hike – Sooner Than Expected

Earlier this week the Federal Reserve began shutting down it’s pandemic-driven monetary policy as officials projected an accelerated timetable for interest rate increases. The recent talks about policy changes happening sooner than expected caused the U.S. central bank officials to change their timeline for projected rate increases from 2024 into 2023. 13 of 18 policymakers project a large increase in borrowing costs in 2023 and 11 of 18 see two quarter-percentage-point rate increases. Seven of the officials see rates moving higher next year, opening the possibility of even more aggressive action.

Federal Reserve Chair Jerome Powell, stated to reporters after the release of the central bank’s latest policy statement and economic projections “there has been initial discussions about when to pull back on the Fed’s $120 billion in monthly bond purchases”. This question should be answered in the coming months on a final decision as they give the economy more time to fully recover. 

Powell’s comment as well as the new Fed policy showcase confidence that the U.S. economy recovery is on track as pandemic related concerns dwindle. As COVID-19 vaccinations become more available we are seeing nationwide pandemic related restrictions lifted. “It is so great to see the re-opening of the economy … and to see people out living their lives again. Who doesn’t want to see that?”, Powell stated. He also noted that central bankers would most likely take their time in declaring any final victory over the virus.

This week’s meeting dictated a turning point in crisis related policies driven from the onset of the pandemic, these unprecedented policies often crossing uncharted territory with its broad and open provision of credit to an economy reeling towards the possibility of an economic depression.

The talks of a new asset-purchase program and the rate increases should be seen as a sign of a healthy economy that has recovered faster than imagined. The Federal Reserve is forecasting the economy to grow 7% this year. 

“Reaching the conditions for liftoff will mainly signal that the recovery is strong and no longer requires holding rates near zero,” Powell.

Though economists remain hopeful in a steadfast recovery, this does not mean a policy change is imminent. This week the Fed held its benchmark short-term interest rate near zero and said it will continue to buy $80 billion in Treasury securities and $40 billion in mortgage-backed securities each month to assist the recovery for the time being.

Prices are also rising. Inflation is expected to exceed the Fed’s 2% target by a wide margin of 3.5% this year and remain elevated for the next two years. The Fed acknowledged the rising risk of persistent inflation may push policymakers toward an earlier rate increase. 

In conclusion the projections forecasted by the Fed are based on a faster moving recovery of the economy than anticipated thus leading to discussions about the next policy phase.

“This change in stance jars a little with the Fed’s recent claims that the recent spike in inflation is temporary,” said James McCann, deputy chief economist at Aberdeen Standard Investments. “The pressure is on to explain the change in stance without setting hares running.”

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