With US inflation reaching 6,8% in November, the highest in four decades, and following a two-day meeting, the Federal Reserve announced it was ending its asset purchase program earlier than expected anticipating several interest rate increases in 2022.
Fed chair Jerome Powell said it will scale back purchases of Treasury and mortgage backed bonds to US$ 30 billion a month, meaning the program would end early next year. At a post-meeting media conference Powell said that the faster taper put the program on track to end in mid-March and that officials expect a gradual rate of policy firming.
He said officials don't expect to raise rates before ending scaling back bond buying, but could hike before reaching full employment.
Projections published alongside the statement showed officials expect three quarter-point increases in the benchmark federal funds rate will be appropriate next year, according to the median estimate, after holding borrowing costs near zero since March 2020. The new projections also showed policy makers see another three increases as appropriate in 2023 and two more in 2024, bringing the funds rate to 2.1% by the end of that year.
The abrupt change in the taper pace reflects inflation developments and the further improvement in the labor market, the policy-setting Federal Open Market Committee said in a statement following a two-day meeting. But the Fed reiterated that it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook.
Powell, whom President Joe Biden recently re-nominated to a second four year term at the helm of the central bank, has faced increasing pressure from both Democrats and Republicans to take more aggressive action on inflation. Powell told lawmakers last month that it was time to retire the Fed's description of high inflation as transitory, a stance it held for most of 2021.
In recent months, surging food and energy prices and accelerating rental inflation have contributed more to overall inflation than earlier in the year, when outsize price increases were concentrated largely in the used-car market and a reopening leisure and hospitality sector.
Unemployment dropped to 4.2% in November from 4.6% in October, a quicker pace of recovery than forecasters had anticipated. Still, the gap between White and Black unemployment rates remains wide - at 3.7% and 6.7%, respectively - and Fed officials anticipated a new broad-based and inclusive approach to judging maximum employment, which they announced last year.