The Fed's economic projections suggested that officials expected to make three interest rate increases next year, setting up for a faster pace of rate increases as the economy recovers. Officials now project rates to stand at 2.1 per cent at the end of 2024.
"With inflation having exceeded 2 percent for some time, the committee expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the committee's assessments of maximum employment," the Fed said in its new statement — putting the onus for rate increases squarely on labor market progress.
By slowing bond-buying and moving decisively toward raising borrowing costs, the Fed is adding less juice to the economic expansion and completing a pivot toward inflation-fighting mode. While officials spent much of the year laying out a patient path for winding down their pandemic-era help for the economy, they have turned more proactive in recent weeks as they have become more worried that a burst in prices this year could linger.
Consumer prices climbed 6.8 per cent in November from a year earlier, the quickest pace of increase since 1982. The Fed's preferred inflation gauge has shown slightly slower gains but has also moved up sharply.
Fed officials initially expected a pop in prices this year to fade. Instead, pressures have broadened beyond goods affected by the pandemic, which have fallen victim to tangled supply chains, and into rent and shelter. In those big categories, upward trends can prove more lasting. Wages are climbing, as are consumer inflation expectations, which could also help price increases to persist.
The Fed has been watching the evidence accumulate warily, though most officials still hold out hope that inflation will fade back toward their 2 per cent annual average goal as global shipping routes clear through backlogs, factory production increases to meet demand, and consumers shift toward more normal spending patterns after scrambling to buy couches, cars and stationary bikes during the pandemic.
But officials had begun to back away from helping the economy so much, announcing the initial plan to slow their bond-buying program following their November meeting. Then, Jerome H. Powell, the Fed chair, signalled late last month and early in December that the central bank was increasingly focused on managing the risk that rapid price gains might linger — teeing up the central bank's shift.
"I think the risk of higher inflation has increased," Powell said while testifying before Congress in late November.
The transition became official on Wednesday.
"They are revising up inflation, revising down unemployment, and as a result they're pushing up the path for interest rates," Neil Dutta, head of US economics at Renaissance Macro, said in reaction to the news. "It's a bit of a 180 on Powell's part."
Fed officials have also taken heart in the speed of the labor market recovery. The jobless rate has fallen to 4.2 per cent, down sharply from the double-digits heights it reached early in the pandemic. Officials now expect unemployment to fall to 3.5 per cent — matching its very low level headed into the pandemic — by the end of next year, their updated economic projections showed.
"Job gains have been solid in recent months, and the unemployment rate has declined substantially," the Fed said in its new policy statement.
Still, many people remain out of the labor market — some because they have retired, but others because of virus fears or a lack of child care. That is making judging how close the economy is to the Fed's goal of "maximum employment" a more complicated task.
Powell at times has suggested that full employment could be reached next year, but he also has expressed uncertainty around that call.
"I think there's room for a whole lot of humility here as we try to think about what maximum employment would be," he said at a news conference in November."
