Federal Reserve Turns Hawkish Now to Avoid Real Pain Later
The central bank hopes that three potential rate increases in 2022 will be enough to tame inflation and prolong the U.S. economic boom.
Fed Chair Jerome Powell plants hard on the pivot.
Photographer: Michael Nagle/Bloomberg
The Federal Reserve, caught embarrassingly offside in its view of U.S. inflation, had to do something to wrest back the narrative with its final policy decision of 2021. What appears to be a sharply hawkish pivot — a forecast for three interest-rate increases in 2022 — is likely a gambit that a tougher stance today will make for a softer economic landing in the coming years.
The U.S. central bank said Wednesday that it would accelerate the tapering of its bond purchases, scaling back by $30 billion a month rather than the $15 billion pace it announced just last month. That moves the end date to March instead of June, opening up the possibility that policy makers could raise the fed funds rate from its current range of 0% to 0.25% as soon as the first half of 2022. Indeed, the updated “dot plot” forecast of the short-term benchmark shows a median expectation among policy makers for three interest-rate increases next year, up from less than one in September. And two officials expect to increase rates four times in the coming 12 months, potentially putting the March decision in play for liftoff from the zero lower bound.