The Federal Reserve Open Market Committee will end its massive increase in economic support in the coming months and hike interest rates three times next year from near-zero to help curb rising inflation.
The Fed plans to reduce its monthly Treasury holdings to $60 billion in January, a drop of $30 billion, before eventually ending that additional support by late winter or early spring and hiking interest rates.
Federal Reserve Chair Jerome Powell announced the Fed’s pending approach Wednesday during an Federal Open Markets Committee press conference following a two-day FOMC meeting. The committee unanimously approved the policy shift this week. The Fed has increased its securities holdings by $4.2 trillion since March 2020 to more than $8 trillion, approximately 35 percent of annual real GDP. In December 2020, the FOMC indicated it would continue increasing its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until maximum employment is reached and long-term inflation remains “moderately above” 2 percent.
Powell cited statistics showing the economic progress that has been made: FOMC participants reported 5.5 percent GDP growth this year and are projecting 4 percent growth in 2022. The U.S. economy has added an average of 378,000 jobs over the last four months, reducing job losses from earlier in the pandemic.
“We are making rapid progress towards maximum employment,” Powell said.
Labor force participation has taken longer than expected to recover, contributing to worker shortages. Supply and demand imbalances have contributed to bottlenecks and heightened inflation, which has had a disproportionate impact on the poor.
Powell added that though much uncertainty remains around the omicron Covid-19 variant, the virus had little impact on the Fed’s decision to more rapidly taper its economic support.
Prior to Powell’s announcement, Federal Reserve Gov. Christopher J. Waller and the Federal Reserve Bank of St. Louis President James Bullard had called on the economic support to end faster than originally planned. Waller has said that reducing market liquidity could free up balance sheet space to deal with future economic shocks and maintain a smooth market.