Powell said Wednesday that his patience was running out. The inflation rate has risen to an almost four-decade high. The average wage is rising. The economy is growing and the unemployment rate is decreasing. Powell stated that all these trends have led Powell and the Fed's policymakers, to conclude that the time is right to accelerate the Fed’s tightening credit.
The central bank stated that it would reduce its monthly bond purchases, which are meant to lower long-term interest rates, at twice the pace it had previously established and that it will likely stop buying bonds in March. This accelerated timeline puts the Fed on track to raise rates in the first half next year.
The policymakers also collectively predicted that they would raise their benchmark short term rate three times next years -- a substantial increase from September when 18 officials were divided over whether to hike the rate even once in 2022. The Fed's key interest rate, which is now close to zero, has an impact on many consumer and business loans. This includes mortgages, credit cards, and auto loans. The rates for these loans could rise as well in the next year.
These policy changes are a sudden shift by Powell to help keep inflation under control and reduce unemployment.
Powell did not declare that the recession had ended and the market for jobs had fully recovered after the Fed's recent policy meeting. Powell said that there had been "rapid progress towards the Fed's goal of "maximum unemployment." He also said that if inflation continues to rise next year, the Fed could decide to raise rates even though maximum employment has not been reached.
He pointed out recent economic reports which have revealed higher inflation, steady wage growth, and steady job gains.
Powell stated that "We need to make policy now" and that inflation has risen well beyond the central bank's target of 2% per year. The economy doesn't need increasing amounts of support because of rising inflation pressures and a strengthening labor market.
Although borrowing costs may rise in the next months due to Fed actions, other loan rates are not always affected by Fed policy changes. Even if the central banks raises rates three times next fiscal year, it would still keep its benchmark rate, which is below 1%, historically low.
The central bank has been describing inflation since spring as a "transitory problem" that would disappear as supply bottlenecks caused by the pandemic were solved. Powell admitted at his news conference that the Fed was wrong to believe that price rises have lasted longer than expected.
Powell said that once consumers expect inflation to continue, it can be harder for the Fed. Expecting higher prices from households can lead to higher wages, which could cause companies to increase prices to compensate for their higher labor costs.
Powell stated that there is a risk that inflation will become more persistent, which could be making inflation expectations under pressure. Part of the reason we made this move is to make sure that we are able to manage that risk.
He stated that the Fed's goals for maximum employment and stable prices has been complicated by the unique dynamics of the pandemic recovery. The Fed had hoped that inflation would rise due to very low unemployment and higher wages. These are indicators of a strong economy. Surging inflation is mainly due to supply chain snarls, and an increase in demand for goods like furniture and cars.
Powell stated that the inflation Powell received was not at all what he had hoped for.
The Fed was not prepared for the price rise. It has spread beyond goods such as food, energy, and autos to include services such as apartment rents, restaurant meals, and hotel rooms. It has had a significant impact on consumers, particularly those with lower incomes, and has made it difficult for them to purchase everyday necessities and negated the higher wages that many workers have earned.
The Fed's policymakers collectively forecast Wednesday that inflation will be 5.3% by the end of the year, according to their preferred gauge. They anticipate inflation slowing to 2.6% per year by 2022. This is an increase from the September forecast of 2.2%.
Gas prices have fallen from their peak levels. Some supply chain bottlenecks are slowly easing. The government stimulus payments that helped to spur an increase in spending which boosted inflation are unlikely to return.
Officials predict that the unemployment rate will fall to 3.5% by next year. This would be the same level as the pre-pandemic levels, when unemployment was at its lowest point in 50 years.
Powell stated that all Fed officials anticipate the central bank's goal for "maximum employment" sometime next year. He also pointed out a rapid decline in unemployment rates in the last two months, from 4.8% down to 4.2%.
He also pointed out that there are near-record job openings. This is a sign that the labor market is strong, with people finding higher paying jobs. Powell expressed hope that the percentage of people looking for work or working is going to rise over time, even though it remains significantly lower than pre-pandemic levels.
He said, "We wouldn't in any way want the idea that the labour market can get better" even after the Fed raises rates.
The Fed buys $90 billion per month in bonds, compared to $120 billion in October. It had previously been decreasing those purchases by $15 Billion per month. Powell stated that the Fed will cut its purchases by $30 billion in January to $60 billion and be on track to stop them entirely in March.
Fed officials expect three rate increases next year and three more in 2023. They also anticipate raising rates twice more in 2024. This will leave their benchmark rate at 2.1% which is still quite low historically.
Wall Street saw stock prices rise gradually, then surge after Powell's speech and the Fed's statement. Stock market averages rose more than 1% at the end of the day. This is a significant gain.