The Federal Reserve signaled Wednesday that it may start raising its benchmark interest rate sometime next year, earlier than it envisioned three months ago and a sign that it’s concerned that high inflation pressures may persist.
In a statement, the Fed also said it will likely begin slowing the pace of its monthly bond purchases later this year if the economy keeps improving. The bond purchases have been intended to lower longer-term loan rates to encourage borrowing and spending.
Taken together, the Fed’s plans reflect its belief that the economy has recovered sufficiently from the pandemic recession for it to soon begin dialing back the extraordinary support it provided after the coronavirus paralyzed the economy 18 months ago. As the economy has steadily strengthened, inflation has also accelerated to a three-decade high, heightening the pressure on the Fed to pull back.
The economy has recovered faster than many economists had expected, though growth has slowed recently as COVID-19 cases have spiked and labor and supply shortages have hampered manufacturing, construction and some other sectors. The U.S. economy has returned to its pre-pandemic size and is thought to be growing at a solid 4% annual rate in the current July-September quarter.
At the same time, inflation has surged as resurgent consumer spending and disrupted supply chains have combined to create shortages of semiconductors, cars, furniture and electronics. Consumer prices, according to the Fed’s preferred measure, rose 3.6% in July from a year ago — the sharpest such increase since 1991.
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