The U.S. Federal Reserve left its key interest rate steady but tightened its monetary policy stance for the second month in a row by lowering the amount of monthly bond purchases amid rising inflation and an improving labour market, and pulled forward the day when the interest rate will be raised.
The Federal Reserve's policy-making body, the Federal Open Market Committee (FOMC), left its target for the federal funds rate at 0.0-0.25 percent, unchanged since March last year when the rate was lowered twice in a single month by a total of 1.50 percentage points.
As last month, the FOMC said economic activity and employment in the U.S. economy have continued to strengthen, but in an important shift - which had been telegraphed by Fed Chair Jerome Powell - the description of inflation as a "transitory" phenomenon was dropped from the statement.
Instead, a unanimous FOMC said "supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation."
Echoing this change, the FOMC raised its forecast for inflation this year through 2023 and its forecast for how high and how fast it expects the federal funds rate to be raised.
The latest projection for the fed funds rate sees the rate rising to 0.9 percent in 2022 - up from the September forecast of 0.3 percent - implying 3 rate hikes of 25 basis points each.
In 2023 the Fed is expected to raise the rate another 3 times to 1.6 percent in 2023, up from the earlier forecast of 1.0 percent.
In 2024 the feds funds rate is seen rising further to 2.1 percent from 1.8 percent, which is still below the estimated longer-run rate of 2.5 percent.
The Fed's preferred measure of inflation, the personal consumption expenditure (PCE), is seen averaging 5.3 percent this year, up from the September forecast of 4.2 percent and October's 5.0 percent reading.
PCE inflation is expected to ease next year and average 2.6 percent, up from the previous forecast of 2.2 percent and then fall to 2.3 percent in 2023 and 2.1 percent in 2024.
Inflation has been accelerating across the world in recent months due to a combination of higher energy and commodity prices on the back of strengthening demand and economic activity as countries slowly recover from the devastating hit from COVID-19 pandemic.
Central banks have responded to the rise in inflationary pressures and above-target inflation readings by unwinding last year's extraordinary stimulus and raising interest rates with smaller economies that are more susceptible to the impact of higher prices leading the charge.
Mozambique, for example, was the first bank to raise interest rates in January due to rising inflation followed by Angola, which levied fees on bank's excess liquidity as it shifted to a more restrictive policy.
Year-to-date 38 central banks worldwide - including 13 from emerging markets and 22 from frontier and other economies - have raised interest rates a total of 112 times and begun to unwind some of the other tools used last year to boost economic activity, such as bond purchases.
Central banks in developed economies, for example Norway, New Zealand, Australia, Canada, Singapore and event the European Central Bank, have also pivoted from monetary stimulus to tightening.
In November the Fed joined the global trend toward monetary tightening by cutting its monthly purchases of Treasury securities and mortgage-backed securities by $15 billion to $105 billion.
Today, the Fed sped up its pace of monetary tightening by reducing monthly asset purchases by $30 billion ($20 billion of Treasuries and $10 billion of mortgage-backed securities) with the result its holdings of Treasury securities will increase $40 billion beginning in January and the holdings of mortgage-backed securities by $20 billion.
With this pace, the Fed will wrap up its asset purchases - known as quantitative easing - by March instead of June, paving the way for rate hikes.
Although the Fed said new variants of the coronavirus still pose a risk to the economic outlook, it raised its forecast for growth in 2022 to 4.0 percent from September's forecast of 3.8 percent. Growth this year is seen weaker than earlier projected, at 5.5 percent compared with 5.9 percent.
In 2023 growth is seen slowing further to a more sustainable 2.2 percent, down from the previous forecast of 2.5 percent, and then stabilizing at 2.0 percent in 2024, slightly above the long-run average estimate of 1.8 percent.
The Board of Governors of the Federal Reserve System released the following statement by the Federal Open Market Committee (FOMC):
"The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.
With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have improved in recent months but continue to be affected by COVID-19. Job gains have been solid in recent months, and the unemployment rate has declined substantially. Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.
The path of the economy continues to depend on the course of the virus. Progress on vaccinations and an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation. Risks to the economic outlook remain, including from new variants of the virus.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent. With inflation having exceeded 2 percent for some time, the Committee expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment. In light of inflation developments and the further improvement in the labor market, the Committee decided to reduce the monthly pace of its net asset purchases by $20 billion for Treasury securities and $10 billion for agency mortgage-backed securities. Beginning in January, the Committee will increase its holdings of Treasury securities by at least $40 billion per month and of agency mortgage‑backed securities by at least $20 billion per month. The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook. The Federal Reserve's ongoing purchases and holdings of securities will continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Charles L. Evans; Randal K. Quarles; and Christopher J. Waller."
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