U.S. stocks rise even as Fed signals three rate hikes next year

The U.S. Wall Street indices are continuing up even after the Federal Reserve said it will go on the offensive to combat inflation.

Federal Reserve to taper at $30 billion a month

Chairman Jerome Powell doubled the pace of tapering to $30 billion a month, which will see an end to bond-buying by March 2022 – a quarter earlier than originally indicated. The FOMC statement reads:

In light of inflation developments and the further improvement in the labour market, the Committee decided to reduce the monthly pace of its net asset purchases by $20 billion for Treasury securities and $10 billion for agency mortgage-backed securities.

All members of the Federal Reserve were in favour of this decision. Once it’s done tapering, the U.S. Fed can start to raise rates – its next step in the battle against inflation.

Officials forecast as many as three rate hikes in 2022

The Central Bank also unanimously agreed on the need for at least one rate hike in 2022, with many forecasting as many as three. The market had priced into two rate hikes next year beginning roughly in May, as per Short Hills Capital Partners’ Steve Weiss.

For the two years after 2022, Fed officials predict two rate hikes each. Chairman Powell agrees that inflation could be more persistent and expects personal consumption expenditures to stand at 2.6% in 2022 versus 2.2% speculated in the September meeting.

Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation.

GDP growth is now seen at 5.5% this year and 4.0% in 2022.