Economy

Fed makes a hawkish pivot in a bid to tame inflation

Most of the Fed’s 18 officials foresee at least three rate increases next year.
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Illustration: Francis Scialabba, Photos: Joshua Daniel/Unsplash, Rudy Sulgan/Getty Images

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Yesterday, the Fed flipped the bird: It signaled a major pivot from a dovish monetary policy (keeping interest rates low, letting the economy run hot) to a hawkish strategy (raising interest rates, slowing down economic growth) in a bid to tamp down surging consumer prices.

The central bank said it will reduce its economy-juicing, bond-buying program at double the pace it had originally announced in early November. When it stops purchasing bonds altogether, which will likely be in March, it plans to begin hiking interest rates to cool down the economy.

And how many hikes will there be? Most of the Fed’s 18 officials foresee at least three rate increases next year, which shows how worried they’ve become about inflation in just the last three months. In September, half of Fed officials believed they wouldn’t have to hike rates at all until 2023.

Big picture: Inflation has replaced the Covid economic crisis at the top of the Fed’s “must tackle ASAP” list. Here’s why:

  • Consumer prices rose at their fastest pace in 39 years in November, and it wasn’t just due to volatile goods, like food and energy. Items across the economy, from rents to home furniture, also rose a concerning amount.
  • And this week, producer prices gained at their fastest pace on record. Higher prices paid by producers often trickle down and hit consumers’ wallets.

At the same time, job gains have been strong and the unemployment rate has plunged to 4.2%, the lowest level since the pandemic began. “We are making rapid progress towards maximum employment,” Fed Chair Jerome Powell said yesterday.

Bottom line: For months, Powell stressed that inflation was “transitory” and related to quirks of the economy reopening. Now he’s singing a different tune. “The risk of higher inflation becoming entrenched has increased. I don’t think it’s high at this moment, but I think it’s increased,” Powell said. Cue the hawkish pivot.—NF

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Morning Brew delivers quick and insightful updates about the business world every day of the week from Wall St. to Silicon Valley.