The Federal Reserve indicated it may start raising its benchmark interest rate sometime next year, earlier than it envisioned in June. 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. These changes potentially signal that high inflation pressures will persist and that the economy has recovered from the recession.
While growth has slowed with recent COVID-19 spikes, the economy has recovered faster than many economists had expected. The U.S. economy has returned to its pre-pandemic size, and the unemployment rate has improved from 14.8%, soon after the pandemic struck, to 5.2%.
Meanwhile, inflation has surged as rising consumer spending and disrupted supply chains have combined to create shortages of semiconductors, cars and electronics. According to the Fed, consumer prices rose 3.6% in July from a year ago — the sharpest such increase since 1991.
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. Additionally, they expect the economy to grow more slowly this year at 5.9%, down from its June projection of 7%.
