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Federal Reserve Will Cut Aid To The US Economy

The Federal Reserve is poised to make an abrupt turn to tighter interest rates this week as inflation accelerates and unemployment is falling faster than expected.

The Fed will likely announce Wednesday that it will reduce its monthly bond purchases to double the rate outlined by its chairman Jerome Powell six weeks ago. The goal of bond purchases is to lower rates in the long run. Therefore, accelerating its reduction – probably towards April – will reduce the aid that the Fed has provided since the coronavirus pandemic broke out last year.

Central bank officials are expected to forecast raising their short-term benchmark rate, which has been near zero since March 2020, two or three times next year. In turn, these increases would raise the costs of a wide range of loans, such as mortgages, credit cards, and some business loans. Three months ago, the Fed had forecast a single rate hike in 2022.

This Fed turnaround comes as consumer inflation peaked in four decades in November. It reflects that Powell and other officials acknowledge that the economy has not progressed as they anticipated a few months ago.

For much of 2021 they had calculated that inflation would be “transitory” and were more concerned about the possibility that unemployment would not fall quickly enough. But the price increases have extended beyond industries affected by the pandemic such as automotive, electronics and building materials to rentals, restaurants and healthcare. Rising inflation weighs heavily on many households, especially those struggling to afford food and fuel, and is a source of dissatisfaction with the administration of President Joe Biden and Democratic lawmakers.

Fed officials expect inflation to cool down by the second half of next year. But they foresee a significant risk that high prices will persist. The government reported Tuesday that wholesale inflation rose 6.9% in the 12 months ending in November, the highest annual rate since 2010.

The unemployment rate has fallen since the Fed meeting in November, from 4.8% to 4.2%, a sign that the economy is strong and approaching maximum employment, one of the Fed’s two terms along with price stability. .

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