The Federal Reserve on Wednesday projected that interest rates will rise next year as it begins to end the pandemic-era stimulus that has kept rates near zero in order to combat rising inflation.
The central bank announced Wednesday that it will start "tapering" its monthly asset purchases more quickly. Beginning in January, the Fed will buy $20 billion fewer of treasury securities and $10 billion fewer of mortgage-backed securities each month. Next year the Fed will make monthly purchases of $40 billion in Treasury securities and $20 billion in mortgage-backed securities, though these amounts are likely to be adjusted down as the Fed shapes its policy to fit economic conditions.
"If the economy evolves broadly as expected, similar reductions in the pace of that asset purchases will likely be appropriate each month, implying that increases in our securities holdings would cease by mid-March, a few months sooner than we anticipated in early November," said Federal Reserve Chairman Jerome Powell at a press conference.
He explained that the Fed is ending its stimulus more quickly because, "with elevated inflation pressures and a rapidly strengthening labor market, the economy no longer needs increasing amounts of policy support."
"The path of the economy continues to depend on the course of the virus," Fed officials said Wednesday. "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 announcement comes after the Federal Reserve concluded its final meeting for the year. As was widely expected, the Fed projected that interest rates will rise next year as it slows the pace of asset purchases.
Fed officials say that the central bank's benchmark interest rate will rise to 0.9% in 2022, up from the 0.3% expectation from September. Interest rates are projected to rise three times next year and another three times more in 2023.
They also project the U.S. economy to grow 4% in 2022 and unemployment to fall to 3.5% by the end of the year, according to the Fed's latest growth forecast.
Since the spring of 2020, the Fed has purchased about $120 billion a month in bonds, injecting money into the economy to keep interest rates low. Last month, the Fed said it would slow asset purchases, with the target of ending the stimulus in June 2022. Wednesday's policy announcement is consistent with the Fed's previous statements, though it will double the pace at which the Fed ends the stimulus.
Asked by reporters why the Fed is changing policy now, Powell said: "It's essentially higher inflation and faster, much faster progress in the labor market."
He said one concern is that rising inflation could negate the wage increases lower-paid workers have made in recent months amid a widespread labor shortage.
"We have to make sure that higher inflation doesn't get entrenched. It's one of the two main threats, the other being the pandemic, to getting back to maximum employment," he said.
Recent polls say that inflation is a top concern for Americans. The Labor Department reported last week that the inflation rate rose 6.8% over the last 12 months — the largest increase since 1982. Prices for food, gas, heating, oil, and all manner of consumer goods have risen sharply, partly because of supply chain distortions caused by the pandemic, and partly because, Republicans say, government stimulus spending.