The Federal Reserve could raise interest as rates as soon as 2022 — sooner than previously expected — but it’s likely to be a close call.
The central bank’s newly released economic forecast for the next few years shows the Fed lifting U.S. interest rates next year by a quarter-point. Previously the Fed had indicated it would wait until 2023.
A rate hike is not set in stone, however.
Nine of the Fed’s senior policymakers predicted a rate increase in 2022 through a so-called dot plot chart that reflects each individual’s forecast. Yet nine other members expected to keep rates near zero.
Even though there was a 9-9 split, the dot plot showed a rate hike in 2022 because it averages all 18 forecasts on where interest rates would end up.
Yet not all 18 of these senior Fed officials are voters on the bank’s interest-setting panel known as the Federal Open Market Committee. And that’s critical.
The panel is composed of seven Federal Reserve board members, the president of the New York Fed and a rotation of four of the remaining 11 presidents of Federal Reserve banks.
By and large, the Fed board led by Chairman Jerome Powell has been less aggressive in wanting to see rates increased. They have by far the most influence over what the Fed does.
The Fed bank presidents, on the other hand, tend to be somewhat more aggressive in combating inflation. Inflation is running above 4% this year and recently hit a 30-year high, using the bank’s preferred PCE price barometer. It’s twice as high as the Fed’s 2% target.
Would Powell risk a split on the FOMC in 2022 if push came to shove? Economists say no. They expect he would try to build a consensus, leaving in doubt whether the first rate hike takes place next year or in 2023.
Powell himself stressed that point in a press conference after the Fed’s highly anticipated two-day strategy session.
“These projections do not represent a committee decision or plan and no one knows with any certainty where the economy will be a year or more from now,” he said.
What’s more, Fed officials are broadly in agreement about higher rates in the long run. The dot plot indicates three increases in both 2023 and 2024 to push a key short-term rate up to 1.8%.
All but one of the Fed’s top 18 senior officials expect rate hikes in 2023 and they are unanimous about 2024.