As a direct result of elevated inflation data, the Federal Reserve announced a pivot toward tighter policy at the conclusion of its December policy meeting, according to the NAHB’s Eye on Housing. Its new monetary path aims to accelerate the tapering of mortgage-backed securities and Treasuries purchases and suggests new estimates for 2021 inflation. The latest announcement likely means higher interest rates in 2022 and in 2023, though the Federal Reserve did not announce a change in the federal funds target.
Today’s announcement makes several changes to both the Fed’s economic outlook and its implied monetary policy path:
- Acceleration of tapering of purchases of mortgage-backed securities and Treasuries
- The central bank will double the pace of tapering with an anticipated conclusion of bond purchases in March 2022
- Retirement of “transitory” inflation expectations
- The Fed’s outlook notes that supply-demand imbalances are contributing to “elevated levels of inflation”
- The Fed’s economic projections increased its estimate for 2021 inflation (under the core PCE measure) from 3.7% to 4.4%
- As an indication that inflation will persist well into 2022, the projection for inflation next year increased from 2.3% to 2.7%
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