First Fed Rate Hike Could Be Just Months Away

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8

That’s how few months may be left before the Federal Reserve starts raising its benchmark interest rate again, setting the stage for the first widespread increase in consumer borrowing costs in years.

As of its last meeting, the Fed’s policymaking arm was split on whether its first rate hike would come next year or later, but rising inflation rates have many now convinced it will be mid-2022. For example, Goldman Sachs economists on Friday moved their forecast for the first rate increase to July of 2022—a full year earlier than they had previously expected—and said another will likely come in November. The CME Group’s FedWatch Tool, which is based on pricing of fed funds futures contracts, on Tuesday showed traders betting on a mid-2022 rate increase, with a 68% chance of a rate hike in July and over a 50% chance of one in June.

Why is this important? The fed funds rate is one of the most influential interest rates, a benchmark for how much we pay to borrow through all sorts of loans. Since the pandemic began, it’s been at virtually zero, but the committee is meeting this week and may shed more light Wednesday on how soon we can expect the first increase, a tool typically used to help control inflation.

A precursor to the rate hikes will be a tapering of asset purchases, a step economists including Diane Swonk of Grant Thornton expect the committee to announce Wednesday and finish by mid-2022.

“It may have to accelerate that timeline if inflation doesn’t moderate fast enough,” Swonk wrote in a commentary Sunday.

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