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The U.S. Federal Reserve will be forced to taper off its $120-billion monthly bond purchases swiftly and raise interest rates next year to tame inflation, according to a majority of 49 academic economists polled by the Financial Times.
Consumer demand, coupled with savings amassed during last year’s shutdown and global shortages and supply chain disruptions, have pushed inflation to its highest rate in 13 years, the FT reported, and more than double the Fed’s target rate of 2 percent.
As a result, the Fed likely will give up on its goal of waiting for “maximum employment” before raising rates, the economists said.
The Fed’s official expectation is that it will not raise rates until 2023, bank officials have said repeatedly.
The Fed also will end its bond purchases some time next year, the majority predicted.
The Fed has said that ending the bond purchases is a necessary prelude to raising rates, as we reported in “Will Fed Reduce Bond Purchases Later This Year?” (3 Aug 2021).
The Fed will announce the beginning of the end of its bond purchases at its November meeting, 40 percent of survey respondents said; 30 percent expect the announcement at the December meeting and 25 percent expected no announcement this year.
The Fed will raise rates by a quarter of a percentage point next year, more than 70 percent of those polled believe, with about 20 percent expecting the hike to come in the first six months of 2022.
Any predicted timeline depends on the COVID virus being controlled and the job market remaining strong, the economists cautioned, two conditions currently not being met.
COVID hospitalizations are at record rates in several states and the economy added only 235,000 jobs in August after posting about a million in each of July and August (see related story).
The consumer price index rose 5.4 percent in August, according to preliminary data from the U.S. Bureau of Labor Statistics; the official rate is scheduled to be released today.
The U.S. unemployment rate will end this year at 4.9 percent, the economists said, with 43 percent saying the job market would not attain its pre-COVID jobless rate of 3.5 percent until 2023; 23 percent think 2024 is a more realistic time frame.
TREND FORECAST: With politicians imposing a series of new mandates to fight the COVID War across the nation, and the public’s COVID fears rising, the economists’ expectation of a quick end to the Fed’s bond-buying and an interest rate hike in the next nine months is too optimistic.
While inflation pressures the Fed to raise rates now, the central bank will delay any decisions until at least next year to see how quickly—or slowly or at all—the jobs market and consumer spending react to higher prices.
That will delay rate hikes until at least the middle of next year at the earliest.