Fed foresees a potential rate hike as soon as next year

Wednesday, September 22, 2021

WASHINGTON (AP) — The Federal Reserve signaled Wednesday that it may start raising its benchmark interest rate sometime next year, earlier than it envisioned three months ago and a sign that it’s concerned that high inflation pressures may persist.

In a statement, the Fed also said it will likely begin slowing the pace of its monthly bond purchases “soon” if the economy keeps improving. The bond purchases have been intended to lower longer-term loan rates to encourage borrowing and spending.

Taken together, the Fed’s plans reflect its belief that the economy has recovered sufficiently from the pandemic recession for it to soon begin dialing back the extraordinary support it provided after the coronavirus paralyzed the economy 18 months ago. As the economy has steadily strengthened, inflation has also accelerated to a three-decade high, heightening the pressure on the Fed to pull back.

Stock and bond traders appeared pleased by the Fed’s policy statement Wednesday, at least initially. Soon after it was issued, the Dow Jones Industrial Average’s gain for the day surged from 1% to 1.5%. And the yield on the 10-year Treasury note dipped from 1.32% to 1.30%.

The economy has recovered faster than many economists had expected, though growth has slowed recently as COVID-19 cases have spiked and labor and supply shortages have hampered manufacturing, construction and some other sectors. The U.S. economy has returned to its pre-pandemic size, and the unemployment rate has tumbled from 14.8%, soon after the pandemic struck, to 5.2%.

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