Wary US Federal Reserve moves closer to 2022 rate hike despite new waves of Covid hitting the economic recovery
The US Federal Reserve has indicated it could raise interest rates sooner than expected amid persistent inflation fears.
More of its officials expect an increase next year instead of in 2023, although the Fed said it would hold interest rates at the historically-low level of 0.25 per cent.
Inflationary pressures are growing, with consumer prices up 3.6 per cent in July compared with a year ago – the biggest rise since 1991.
Decision maker: The Federal Reserve, led by chairman Jerome Powell (pictured), has indicated it could raise interest rates sooner than expected.
The central bank also said it would soon scale back a huge bond-buying programme it launched to help businesses. ‘If progress continues broadly as expected, the committee judges a moderation in the pace of asset purchases may soon be warranted,’ the rate-setting open market committee said.
Despite the apparent optimism, it increased its projection of peak unemployment to 4.8pc for the end of the year, up from an earlier projection of 4.5 per cent.
The Fed, which is chaired by Jerome Powell, also cut its economic outlook, with it now expecting GDP to rise 5.9 per cent this year, compared with a 7 per cent forecast in June.
But despite the fact that inflation has increased faster than predicted, the Fed said it would simmer back down towards the 2 per cent target by next year.
That echoes the Bank of England, where Governor Andrew Bailey argues price rises are a ‘transitory’ result of the economy snapping back from the doldrums of the pandemic.
Overall, analysts said the Fed’s plans reflected a belief that the economy has recovered sufficiently from the pandemic recession for it to soon begin scaling back the extraordinary support it has provided.
The US economy bounced back to its pre-pandemic size faster than many experts had expected and is thought to be growing at a 4 per cent annual rate.
However, that slowed recently as Covid cases spiked again amid a staff shortage in some industry sectors.
Some economists warn the Fed’s support could cause the economy to overheat and for inflation to get out of control.
Others think increasing interest rates too soon could hammer fragile businesses with extra costs and lead to heavy job losses.
Fed officials now expect to raise interest rates once in 2022, three times in 2023 and three times in 2024. The rate has been near zero since March 2020.