Fed to raise interest rates in effort to slow inflation

The Federal Reserve will quicken the pace at which it’s pulling back its support for the economy as inflation surges, and it expects to raise interest rates three times next year.

In an abrupt policy shift, the Fed announced Wednesday that it will shrink its monthly bond purchases at twice the pace it previously announced, likely ending them altogether in March.

The accelerated timetable puts the Fed on a path to start raising rates in the first half of next year.

The Fed’s new forecast that it will raise its benchmark short-term rate three times next year is up from just one rate hike it had projected in September.

The Fed’s key rate, now pinned near zero, influences many consumer and business loans, including for mortgages, credit cards and auto loans.

Those borrowing costs may start to rise in the coming months, though the Fed’s actions don’t always immediately affect other loan rates.

And even if the central bank does raise rates three times next year, it would still leave its benchmark rate historically low, below 1%.

In a statement after its latest meeting, the Fed said that even with inflation far above its 2% target, it won’t likely begin raising rates until it has reached its goal of “maximum employment.”

The Fed has not clearly defined when that target would be reached.

The policy change the Fed announced Wednesday had been signaled in testimony Chair Jerome Powell gave to Congress two weeks ago in discussing the extraordinary support the Fed supplied the economy after the pandemic struck last year.

The shift reflects Powell’s acknowledgement that with inflation pressures rising, the Fed needed to begin tightening credit for consumers and businesses faster than he had thought just a few weeks earlier.

The Fed had earlier characterized the inflation spike as mainly a “transitory” problem that would fade as supply bottlenecks caused by the pandemic were resolved.