US Federal Reserve predicts interest rates could rise by next year

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President Jerome Powell has said the Fed may soon announce a withdrawal from bond purchases at its next meeting in November.

Washington – The US Federal Reserve said on Wednesday that it could start raising policy rates sometime next year, earlier than expected three months ago, and that strong inflationary pressures could continue. I am worried about this.

In a statement, the Fed also said that if the economy continues to improve, it will likely start to slow the pace of monthly bond purchases “immediately”. Bond purchases aim to lower long-term lending rates in order to facilitate borrowing and spending. During a press conference, President Jerome Powell said the Fed may soon announce a withdrawal from bond purchases at its next meeting in November.

In summary, the Fed’s plans reflect the belief that the economy will fully recover from the pandemic recession and that the extraordinary support it has provided can be quickly regained after the coronavirus crippled the economy 18 months ago. . I am. As the economy steadily strengthens, inflation has accelerated to 30-year highs, increasing pressure on the Fed to pull out.

Equity and fixed income traders seemed happy with the Fed’s policy statement on Wednesday, at least initially. Immediately after its issuance, the Dow Jones Industrial Average fell from 1% to 1.5% on that day. Yields on 10-year government bonds fell from 1.32% to 1.30%.

The economy has recovered faster than many economists expected, but growth has recently slowed as the number of COVID-19 cases has increased and labor and supply shortages have increased. hampered manufacturing, construction and other sectors. .. The US economy has returned to pre-pandemic scale and the unemployment rate fell from 14.8% immediately after the pandemic to 5.2%.

At the same time, inflation has skyrocketed due to a shortage of semiconductors, automobiles, furniture and electronics, combined with a resurgence in consumer spending and disruption in the supply chain. ‘supply. Consumer prices rose 3.6% from a year ago to July, according to indicators recommended by the Federal Reserve. This is the strong increase since 1991.

In the updated quarterly forecast, Fed officials will hike key short-term interest rates once in 2022, three times in 2023 (one more than expected in June), and three times in 2024. wait there. Business loans have been pegged at near zero since the start of the pandemic in March 2020.

However, the Fed will begin to match or cut its monthly bond purchases before it starts raising rates. The central bank began cutting its purchases of government bonds and mortgages by $ 120 billion per month last year after the economy made “further substantial progress” towards the Fed’s targets. ” a maximum of jobs and an average annual inflation rate of 2%. He suggested that there was a possibility to do so. ..

In a statement released after the two-day meeting that ended Wednesday, the Fed “determines that a slowdown in the pace of asset purchases may soon be warranted if progress continues broadly as expected.” Noted.

Inflation has risen enough to meet the Fed’s substantial progress test. And Powell said at his press conference that in his opinion Jobs “almost passed” the test.

Together, the Fed’s pullback in bond purchases and its ultimate rate hike means some borrowers will have to pay more for mortgages, credit cards, and business loans every time they happen.

The Federal Reserve has not hinted at how quickly it will cut back on purchases. However, it is widely expected to cut government bond purchases by $ 10 billion per month and mortgage-backed securities by $ 5 billion.

Powell’s delicate job is to show investors, consumers and business leaders how to start withdrawing their financial support immediately, reassuring investors, consumers and business leaders that they won’t move fast enough. to keep them from recovering from a recession. Powell reiterated his belief that current high levels of inflation will subside as the economy normalizes, in part because central banks are not yet on the verge of raising interest rates. It is said.

However, changes in the Fed’s interest rate forecast suggest central banks are gradually moving closer to it. In March, 18 officials from the policy-making committee predicted that they would not hike rates until 2023. In June, the Commission revised its forecast to hike rates twice in 2023. As next year .

In the latest forecast, policymakers also show that this year’s economic growth is expected to grow slowly from June’s forecast of 7% to 5.9%. Inflation is expected to reach 4.2% by the end of the year, but the inflation forecast for next year has been raised from 2.1% to 2.2%.

Powell also discusses key ethical issues surrounding the investments and transactions of certain federal regional bank governors. Federal Reserve Bank of Dallas Governor Robert Kaplan said in 2020 millions of dollars from individuals such as Amazon, Chevron, Facebook and Google, as the Federal Reserve took special action to stimulate the economy . Financial disclosure revealed that he had traded shares. ..

Last year, Boston Fed Governor Eric Rosengren invested in a real estate investment trust holding mortgage-backed securities of the type the Fed bought as part of an effort to cut rates loan. And Powell himself owns municipal bonds, which the Fed first bought last year to support the market.

A spokesperson said last week that the Fed had a “new and complete view” of the rules surrounding the financial holdings of officials. The investment is allowed under current Fed rules, and Rosengren and Kaplan have promised to sell their shares and reinvest their earnings in index funds and cash.

Asked about this at a press conference, Powell said: It will be a thorough and comprehensive review. We are gathering all the facts and looking at ways to further strengthen the rules and standards. “

As growth and inflation pick up in many countries, the Fed’s expected policy changes will follow similar steps to other central banks in the developed world. The European Central Bank announced earlier this month that it will cut bond purchases, but has yet to announce that this will cease altogether. The central banks of Canada and Australia also cut their bond purchases.

APEconomics writer Martin Crutsinger contributed to this report.

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