But there are still about 4 million fewer people working than there were before the coronavirus struck. The unemployment rate has fallen sharply - from nearly 15% in April of last year to 4.2% last month. There's still considerable uncertainty, though, about what that would look like in a post-pandemic economy. had achieved "maximum employment." There are risks to the Fed's strategy Higher borrowing costs typically lead to slower economic growth, and the Fed has been reluctant to raise interest rates until it feels the U.S. Raising interest rates is the Fed's traditional tool for keeping inflation under control, but it comes with its own price. (The Fed's preferred yardstick for inflation is the index of personal consumption expenditures, which was 5% in October.) So that's eating into everyone's living standards."Ĭommittee members now say they expect inflation to be 2.6% at the end of next year, up from 2.2% that was projected in September. "Even though wages are increasing, inflation is outpacing wage growth. "That feels terrible for everyone," said Megan Greene, a senior fellow at Harvard's Kennedy School of Government.
While average wages have been rising at a rapid pace, prices are climbing even faster. The Fed has repeatedly been surprised this year by both the strength and staying power of inflationary forces. Three months ago, no one on the committee envisioned rates climbing by that much next year.įive other committee members expect rates to rise by half a percentage point next year - up from three who said so in September. That underscores the evolution in the Fed's thinking.
Twelve of the 18 members of the Fed's rate-setting committee now say they expect interest rates to rise by three-quarters of a percent or more in 2022. The Fed has kept interest rates near zero throughout the pandemic in an effort to prop up the economy. There are economic costs to higher interest rates Although the central bank still believes inflation is largely driven by factors tied to the pandemic, which should ease when the health outlook improves, policymakers are no longer taking that as a given.Įconomy Biden reappoints Jerome Powell as Fed chairman at a critical time for the economy In a statement, the Fed acknowledged the rapid runup in prices. The Fed is taking a harder line against inflation after consumer prices in November jumped 6.8% from a year ago - the largest increase in nearly four decades. The central bank said previously it wanted to stop its bond purchases before considering raising interest rates. The Fed started purchasing bonds during the pandemic as a way to keep borrowing costs across the economy low and to prevent any market disruptions.Įnding the bond purchases earlier would give the Fed more flexibility to raise interest rates sooner, if necessary, to keep prices from spiraling out of control. The Federal Reserve is paving the way for possible interest rate hikes next year, in an effort to contain stubbornly high inflation.Īt the conclusion of a two-day policy meeting Wednesday, the central bank announced plans to phase out its large-scale bond-buying program faster than initially planned. The Fed unveiled a new game plan on Wednesday as it looks to tackle red-hot inflation. Federal Reserve Chairman Jerome Powell testifies during a hearing before the Senate Banking Committee on Nov.