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The Fed is expected to take one of the most restrictive turns in years

This week, Federal Reserve officials will accelerate the withdrawal of the bond purchase program and signal the rise in interest rates in 2022, economists surveyed by Bloomberg said, announcing a historic shift in policy to counter inflation further. fast since the 1980s.

More than half of the economists surveyed estimate that the Fed’s quarterly forecasts, to be released when its two-day meeting ends on Wednesday, will show that the median of 18 officials projects two rate hikes next year from current levels nearby. steel.

This represents a change from the predictions of September, when those responsible for monetary policy were evenly divided on whether the start of the rate hike would be in 2022 or 2023. The survey of 49 economists was conducted from December 3-8 .

“It’s going to be the most restrictive change in the history of the dot plot,” said Laura Rosner-Warburton, senior economist at Macropolicy Perspectives, referring to the Fed’s rate forecasts that have been released since 2012.

Central bank chairman Jerome Powell told lawmakers on November 30 that it would be appropriate to consider accelerating the reduction of the asset purchase program to end a few months before the originally planned conclusion in mid-2022.

Perspective of the withdrawal of the stimulus

“The process of reducing the stimulus program has become a straitjacket, preventing the Fed from responding to higher-than-expected and more persistent inflation,” said Philip Marey, senior US strategist at Rabobank, in a response. to the survey. “Therefore, they are likely to double the rate of reduction to create the option of raising the rate in March.”

Bets on the interest rate futures markets show around 66 basis points of increases by the end of next year.

More than half of economists expect the Federal Open Market Committee (FOMC) to double the rate of reduction to $ 30 billion per month, beginning in January and ending in March.

Policymakers are expected to project two rate hikes in 2022, forecast three moves in 2023 and two more in 2024, with rates reaching 1.9% that year. That represents a somewhat steeper rate path than the FOMC projected in September. The trajectory coincides with the predictions of economists, who project that rates will reach 2% in 2024.

Powell’s Whirl

Powell’s shift toward a more restrictive outlook on the withdrawal of the stimulus has been driven by rising inflation. Since the Fed’s November 2-3 meeting, data has shown that consumer prices rose 6.2% in October and 6.8% in November, the fastest rate since 1982.

Nearly half of the economists surveyed said the surge, concerns about inflation in the White House and the appointment of Powell as Fed chairman have contributed to the tightening stance.

The FOMC is likely to forecast a persistence of inflation and raise its forecasts for headline inflation from 2022 to 2.5%, according to the survey. Monetary policy makers are also expected to show unemployment to fall to 3.7% by the end of 2022, which would be below their long-term forecasts of 4%.

Economists expect the Fed to keep the language in its monetary policy statement that it does not plan to raise interest rates until the country reaches “maximum employment” and inflation reaches 2% and is on track to exceed 2%. for some time.

Almost all economists, however, expect the FOMC to amend or delete its phrase that inflation largely reflects factors “expected to be transitory,” after Powell told Congress that it’s time to drop the word “transitory.” .

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