The Federal Reserve gave multiple indications Wednesday that it is about to end its easy policy in response to rising inflation.
The Fed said it will accelerate the reduction of its monthly bond purchases.
The Fed will be buying $60 billion of bonds each month in January, half the level prior to the November taper and $30 billion less than in December. The reduction in the Fed's monthly budget was doubled in December and will be further increased in 2022.
The central bank expects to start raising interest rates in the late winter or early spring after that.
Projections released Wednesday show that the Fed will raise rates as many as three times in the next four years.
The Federal Open Market Committee has been loose in its policy for over a century. The impact of inflation was noted in the post-meeting statement.
The reopening of the economy has contributed to elevated levels of inflation because of supply and demand imbalances.
The committee raised its inflation outlook to 5.3% from 4.2% for all items and to 4.4% from 3.7% for food and energy.
Job gains have been solid in recent months, and the unemployment has been low.
The rate has fallen.
The members came out on the side of policy moves that were in favor of rate hikes. The dot plot of individual members rate expectations showed that six of the 18 members saw less than three increases next year, and no members saw rates staying where they are now.
The Fed said in a statement that it would keep its overnight borrowing rate at zero until labor market conditions are in line with the Committee's assessment of maximum employment.
The committee reduced its forecast for economic growth this year, seeing GDP rising 5.5% for the full 2021, compared to the 5.9% indicated in September. The officials revised their forecasts in the year after, raising the growth rate to 4% from 3.8% and lowering it to 2% from 2.5%.
Inflation is running at its highest level in 39 years, and both policy moves came in response. Inflation pressures are becoming more ingrained and broad-based, as evidenced by the 9.6% jump in wholesale prices in November.
Fed officials have long stressed that inflation is not a long-term problem. He and other central bank leaders have said that prices are booming because of the Pandemic and will eventually fade.
The post-meeting statement eliminated the term as it had become a negative. Powell said during congressional testimony last month that it was probably a good time to stop using the word.
A policy enacted just over a year ago has been pivoted off by the Powell Fed. It was known as flexible average inflation targeting, which meant it would be content with inflation being a little above or below its long-held 2% target.
The Fed was willing to let inflation run a little hot in the interest of healing the labor market from the hit it took during the pandemic. The new policy of the Fed sought full and inclusive employment across racial, gender and economic lines. The central bank had raised interest rates in the past, but officials decided not to do it again.
The Fed has had to rethink its intentions after inflation began to look stronger and more durable.
The asset purchase taper began in November with a reduction of $10 billion in Treasury purchases. The month buys were still left at $70 billion and $35 billion.
Over the past four weeks, the Fed's balance sheet increased by just $2 billion, with Treasury holdings increasing by $52 billion and the amount of mortgage backed securities decreasing by $23 billion. Over the past year, Treasury holdings have increased by over a billion dollars while the amount of mortgage backed securities has increased by over half a billion dollars.
The Fed would have to decline its holdings until it stops adding to its portfolio under the new terms of the program. That would allow the Fed to raise rates after the spring when the quantitative easing program ends. The Fed said it would not raise rates and would not buy bonds at the same time.
The Fed could either sell securities or allow the proceeds of its current bond holdings to run off at a controlled pace.
Powell is likely to be questioned at 2:30 p.m. Since the early days of the Pandemic, the balance sheet has expanded by nearly $3.9 trillion.
