Not only will the Federal Reserve raise interest rates in 2022, it plans to do so three times and will also buy only half as many bonds on a monthly basis as previously announced. The combination of increased inflation and low unemployment levels prompted the Fed to act.
“There’s a real risk now,” chair Jerome Powell said, “that inflation may be more persistent and that may be putting inflation expectations under pressure, and that the risk of higher inflation becoming entrenched has increased. I think part of the reason behind our move today is to put ourselves in a position to be able to deal with that risk.”
Gas prices have begun to fall, and supply chains in some sectors are beginning to get back on track, but overall inflation could last into the second half of next year, the Fed said. From the time Powell started speaking to the time he finished, the Dow Jones Industrial Average jumped 300 points, and indication that Wall Street is happy to know what to expect and that the news about interest rates sounds good to investors.
While being cautious about inflation, Powell painted a rosy picture of the economy, saying, “Fundamentally,” he said, “the consumer is really healthy, and we expect personal consumption expenditures to be pretty strong” to close out the year.
That squares with the assessment of Bank of America CEO Brian Moynihan, who this week told the Associated Press that consumers are spending at a faster rate than he’s ever seen.
Interest rates have been near zero throughout the pandemic as an encouragement to businesses to borrow, people to buy houses, and in general keep money flowing through the economy instead of sitting in interest-bearing bank accounts.
Leave a Reply