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Panic at the Fed: Interest Rate Increases Coming as Inflation Soars

Published: December 15, 2021
WASHINGTON, DC - NOV. 30: Federal Reserve Board Chairman Jerome Powell testifies during a hearing before Senate Banking, Housing and Urban Affairs Committee on Capitol Hill Nov. 30, 2021 in Washington, DC. The committee held a hearing on "CARES (Coronavirus Aid, Relief, and Economic Security) Act Oversight of Treasury and the Federal Reserve: Building a Resilient Economy." (Image: Alex Wong/Getty Images)

On Wednesday Dec. 15, the Federal Reserve (Fed) lifted its forecast for U.S. inflation in 2022 to 2.6 percent, up from its prior estimate of 2.2 percent, sending signals that price pressures won’t dissipate for Americans as rapidly as senior officials once believed. 

A year ago, inflation was near zero, practically non-existent and was a distant concern; however over a 12-month period ending in Oct. 2021, Americans have had to endure upwards of 5 percent inflation which marked the fastest increase in 31 years. 

The consumer price index (CPI) has surged to its highest level in almost 40 years and businesses are noticing. Retail sales for November, a typical busy pre-holiday season, hardly rose at all and when adjusted for inflation actually declined. 

While the inflation currently being experienced has to date been characterized as “transitory” the Fed has now opted to drop that word in the face of what could be runaway inflation.

Following a two-day meeting the Fed dropped the term “transitory” and instead simply stated, “Supply and demand imbalance related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation,” USA Today reported.

Inflation is now expected to persist as far out as 2024. Inflation in 2023 is predicted to slow to 2.3 percent and in 2024 Americans can expect to shoulder another 2.1 percent in inflation.

This acknowledged reality has prompted the Fed to clear the way for earlier and faster interest rate hikes in 2022.

While the Fed’s policy making committee left its benchmark rate near zero it now projects three rate hikes in 2022 up from one in its September forecast. Three additional rate hikes are expected in 2023 and two more in 2024. All in all interest rates are predicted to be at 2.1 percent by the end of 2024.

The Fed has also announced that it will be ending its bond-buying stimulus program for the U.S. economy sooner than previously planned. Previously they were going to end the program in June of this year however have now moved it up to March.

In an attempt to keep long-term interest rates low, the Fed has been buying $120 billion in bonds on a monthly basis. The scheme was concocted in an attempt to keep rates for auto loans and mortgages low while providing an environment where it was cheaper for businesses to invest. 

Despite its abrupt moves the Fed insists that the amount of inflation currently being experienced is primarily due to temporary shortages of labor and business supplies tied to the pandemic and these shortages are expected to abate in 2022.