WASHINGTON – The Federal Reserve signaled Wednesday it may start raising its benchmark interest rate sometime next year, earlier than it envisioned three months ago and a sign 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. At a news conference, Chair Jerome Powell said the Fed could announce a pullback in bond buying as soon as its next meeting in November.
Taken together, the Fed's plans reflect its belief the economy has recovered sufficiently from the pandemic recession for it to soon begin dialing back the extraordinary support it provided after the novel 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 took the Fed's message Wednesday in stride. The Dow Jones Industrial Average, which had been up more than 400 points before the Fed issued a policy statement, closed up 338 points, or a full 1%. The yield on the 10-year Treasury note was little changed at about 1.31%.
In its updated quarterly projections, Fed officials now expect to raise their key short-term rate once in 2022, three times in 2023 – one more than they had projected in June – and three times in 2024. That benchmark rate, which influences many consumer and business loans, has been near zero since March 2020, when the pandemic erupted.
Before it starts raising rates, though, the Fed expects to begin paring, or tapering, its monthly bond buying.