Fed doubles the pace of tapering program, dot plot suggests 3 rate hikes in 2022

Yahoo Finance's Brian Cheung details the Federal Reserve's last announcement of 2021.

Video transcript

- And it is 2:00 PM, and that means, guess what, we're going to bring in Yahoo Finance's Brian Cheung, who has all the latest. Brian, can you break this down for us?

BRIAN CHEUNG: Well, breaking news, the Federal Reserve has officially doubled the pace of its tapering program. Again, the Fed was buying trillions of dollars in US treasuries and agency mortgage-backed securities, since the depths of the pandemic, to message to markets its commitment to keeping its easy money policies. Now the Fed set a course in November to start to pare back those purchases, to bring it to a full stop by the middle of November.

That pace, set forth in the first week of November, was about $15 billion per month. The Fed will now double that to $30 billion per month, which would put an end to the so-called quantitative easing program by March of next year. Now there's a lot to unpack in this Federal Reserve announcement, a lot of language changes. The big shift, really, to a faster taper has to do, of course, with inflationary pressures.

The Federal Reserve no longer describing inflationary pressures as transitory, instead, the statement says, quote "supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to elevated levels of inflation." On the job front, the Fed described job gains as, quote "solid in recent months, and the unemployment rate has declined substantially." Now what's interesting is that the Fed did say that risks to the economic outlook remain, including new language that says, if this includes new variants of the virus.

Now, the Fed is also trying to balance its approach to tapering, alongside its reaction function to eventually raising interest rates. And those that are in the know, know that this Fed announcement also came alongside a set of economic projections, what they call the summary of economic projections. If we unpack the dots that are in there, which map out the 18 members of the FOMC, and where they see interest rates going in the next few years, notable to see that none of the 18 members of the committee see the case for holding interest rates at near 0 through the balance of next year.

Instead, the median member of the FOMC now sees the case for three interest rate hikes by the end of next year. So certainly a much more aggressive Fed than what we had seen telegraphed in September, where, you'll recall, nine members of the committee saw the case for no interest rate hikes next year. But the other nine saw the case for at least one interest rate hike.

If you look out to 2023 and 2024, you have a number of other possible interest rate hikes as well. In fact, if you actually look at the 2023 projection, the median member sees another three to four interest rate hikes that year, with another one or two in 2024. And, also, a lot of this is because of those inflationary pressures.

The projections in the SEP have the median member of the FOMC projecting 2.6% inflation, as measured by personal consumption expenditures. That's a notch up from the 2.2% that we had seen in the September projection. So there's a lot to unpack in this statement.

One other thing that's worth noting, with regards to the framework, the Federal Reserve actually changing its language with regards to its announcement that it was going to hold interest rates to near 0 in this particular meeting, which was expected. They said the committee decided, or rather the committee expects it will be appropriate to maintain near-zero rates until, quote "labor market conditions have reached levels consistent with the committee's assessments of maximum employment."

So the Fed really trying to put the pedal to the metal on the idea, the labor market is going to tell them when to raise rates. But again, the big headline, Fed doubling the pace of the taper, none of the 18 members of the committee seeing the case for holding interest rates at near zero next year, guys.

- Brian, it's Adam. Quick follow up, and it's not something the Fed would answer to. But I imagine Jay Powell might get asked about this. President Biden's going to be appointing new members to the Fed next year. We're going to have new presidents at some of the Federal Reserve banks. How likely is it that the dot plot will change at the next summary of expectations release in March?

BRIAN CHEUNG: Yeah, well, certainly when it comes to the kind of composition of the Fed, in fact, even before we got those announcements, we already knew this committee was going to look very different. First of all, we have two regional Fed presidents, in the Dallas Fed and in the Boston Fed, who were temporarily replaced, because of the trading scandal we saw engulf a number of Fed officials a few months ago.

Now that aside, we also have some departures that are regularly prescheduled. Randal Quarles, whose term as vice chairman of supervision expired in October, will be leaving at the end of this month. I believe this is his last meeting. And then Richard Clarida, the vice chairman of the Fed itself, will be leaving in January of next year. So there's already four officials right there that could be turned over.

And then you also have those vacancies at the Fed itself, which the Biden administration could fill in, at least three they could fill in. Of course, we don't have those names quite yet. The administration had promised to nominate people before the holidays. So we'll see. They only have a few more days left to make those announcements. But the composition of this Fed could indeed change.

And that means the dots themselves could change, because, again, each of those 18, at its max, actually 19 members of the committee, gets to plot out where they see interest rates going. If you have at least four people turning over next year, that means that those dots could certainly move next year. But of course, we only get these projections on a quarterly basis, which means the next time we'll get a read will be in March. And as you mentioned, Adam, the Fed could look very different by that point in time.

- All right, Brian Cheung, thank you so much for that report.