Interest Rate Hikes May Come Sooner and More Often

Fed officials and forecasters say they're needed to control inflation

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It’s looking like the Federal Reserve may raise interest rates sooner than we thought, judging from a new survey of professional economic forecasters and recent comments from Fed officials.

Key Takeaways

  • An increasing number of forecasters expect the Federal Reserve to raise its benchmark interest rate more aggressively next year in an attempt  to control the fastest inflation in 30 years.
  • The share of professional forecasters in an NABE survey who predict the Fed will raise rates at least twice next year has more than doubled since September.
  • Even Fed officials, once patient on inflation, have started to signal a more aggressive tapering of asset purchases, which is seen as paving the way for rate increases to start sooner.

With inflation pressures showing no signs of abating, the share of respondents in the latest National Association for Business Economics (NABE) survey who expect the Fed to raise rates at least twice in 2022 more than doubled to 38% since September, when only 15% expected two hikes. The survey of 48 professional forecasters, released Monday, was taken Nov. 12 through Nov. 21.

In another development, St. Louis Fed President Jim Bullard, who, unlike some others, has been predicting higher inflation all year, told reporters last week that the Fed should end its asset purchases faster than originally planned, which would give it the option of raising the benchmark fed funds rate sooner, if necessary. Similar sentiment was echoed by other officials, including Fed presidents from Atlanta, San Francisco, and Cleveland, and former Fed Vice Chair Randy Quarles.

The fed funds rate is the average interest rate banks pay one another for overnight loans, and it’s important for consumers because it affects the cost of borrowing for many things, including mortgages and credit cards. The rate is set at a range, currently between 0% and 0.25%, where it’s been throughout the pandemic. That low rate was meant to stimulate the economy by encouraging purchasing. 

And it did. The combination of easy credit and government stimulus money fueled record demand for durable goods and opened the way for inflation, which erodes consumers’ purchasing power and cuts their standard of living. The uptick in expectations for faster interest rate hikes reflects some economists’ concerns that the Fed has been behind the curve on  inflation and may have to move quickly now. Raising the benchmark rate sooner and more frequently would slow down the economy by making it more expensive to borrow money for just about anything.

Patience is Fading

Up until now, the Fed has been patient on inflation, saying it was “transitory,” meaning it would pass once the economy returned to normal. At the Fed meeting in September, half of the 18 participants (12 members of the committee that decides policy plus additional regional Fed bank presidents) envisioned one interest rate hike next year, with only three forecasting two.

But as inflation continued to gather steam because of snarled supply chains and labor shortages, the Fed announced in early November that it would start paring back its asset-purchasing program, a tool it used to keep the economy flush with cash since the start of the pandemic. The so-called tapering of asset buying is seen as the first step on the way to interest rate hikes. 

Fed Chairman Jerome Powell said at the time that the tapering of the purchases would likely be completed around mid-2022 but emphasized that it would not automatically lead to immediate rate hikes. 

But when the consumer price index showed that 12-month inflation in October rose 6.2%, marking the fastest pace in 30 years and setting off alarm bells, some economists, including former Treasury Secretary Lawrence Summers, called for rate hikes to come sooner and more often. Summers, who has been among the most vocal critics of the Fed’s response to inflation, said in a recent interview with Bloomberg that the Fed should be signaling four rate hikes for next year.

Last Call for Punch? 

Few have gone as far as Summers, but Fed officials now seem to be moving toward a faster end to asset purchases, which would give the Fed flexibility to raise interest rates earlier, Fed officials and economists said.

“At this point, the economy is very strong and inflationary pressures are high, and it is therefore appropriate, in my view, to consider wrapping up the taper of asset purchases, which we announced at the November meeting, perhaps a few months sooner,” Powell said in testimony to Congress at the end of November. “I expect we will discuss it at our upcoming meeting.” The Fed’s policy-making arm meets again Dec. 14 and 15.

And Bullard told reporters that last Friday’s November jobs report was strong, which could satisfy the Fed’s goal of a strong labor market and give its members further reason to quicken the taper process. Although nonfarm payrolls rose by only 210,000, half of what some analysts had expected, the report was considered strong because of the rise in the labor participation rate above pandemic levels and a 0.4-percentage-point drop in the jobless rate to 4.2% from the prior month.

“I thought that except for the headline number, that the report seemed quite strong across the board,” Bullard said.

When all is said and done and the Fed completes its rate hikes, Wells Fargo believes the fed funds rate will stand at the end of 2024 between 2% and 2.25%. “That is above current market pricing and could feel to some at the party that the punchbowl is being removed,” the bank’s economists wrote in a report on Tuesday.

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