The US Federal Reserve could do its first interest rate increase as early as May, after signaling three hikes for next year, according to Ryan Sweet, an economist at Moody's Analytics, APA reports citing Anadolu.
After the Fed's much-awaited two-day meeting concluded on Wednesday, the central bank removed the word “transitory” from describing inflation, saying it would end tapering sooner by doubling the pace of its asset purchases. It signaled three hikes for 2022 to tame record inflation.
At a news conference afterward, Fed Chair Jerome Powell said the central bank could raise interest rates before the economy reaches full employment.
"We had assumed, based on Fed guidance, that full employment was one of the three conditions needed to be met before raising interest rates," Sweet told Anadolu Agency via email. "We may need to pull forward our expectation for the first rate hike, currently September, to May."
About the decision to double the pace of its tapering from $15 billion to $30 billion monthly, Sweet said: "This will wrap up the tapering process by mid-March, three months earlier than previously thought, and opens the door for the Fed to begin raising the target range for the federal funds rate around the middle of the year, if deemed necessary."
As the Consumer Price Index (CPI) rose 6.8% in November, marking its largest 12-month increase since June 1982, the Fed made an aggressive move this week, as many analysts expected.
But it also revised up projections of its preferred inflation indicators – personal consumption expenditure (PCE) inflation and core PCE inflation for 2022 and 2023. And it now forecasts both indicators to reach 2.1%, toward its long-term 2% inflation goal, only in 2024.
"The Fed expects inflation to remain above their target through 2024," said Sweet. "However, inflation could moderate more quickly than some anticipate next year as the year-over-year comparisons become extremely difficult.”
Sweet warned that rents could prevent inflation from decelerating as quickly as anticipated next year, particularly if supply-chain issues remain problematic.
"Industry measures of rents have jumped this year but they normally affect the CPI with a lag. Stronger rental inflation, as measured by the CPI, will likely be more visible by next summer with rates up around 6% on a year-ago basis, which would be the strongest in decades," he said.