US credit will drag on as inflation forces a monetary response. The US Federal Reserve announced that it will double interest rates on which it will phase out its bond purchases next month. Red blood cells economist Josh Nye has predicted that the program will now end as early as March at this rate. This would be months ahead of schedule, with RBC seeing a faster winding down leading to earlier rate hikes.

The US Federal Reserve is falling faster than expected

The Fed held rates but is doubling the rate at which it is tapering off its bond purchases, a sign that easy credit is coming to an end. The Fed will cut its Treasury bill purchases by another $20 billion next month. Purchases of mortgage-backed securities will also fall $10 billion. At this rate, the program should be ready by mid-March. Before this announcement, RBC didn’t see the program end until mid-2022.

High inflation is the main reason why the central bank is easing cheap money. In October, consumer inflation reached 5%, much higher than the target of 2%. It’s more than double the target inflation rate, which is a good reason to cut the gas.

US Federal Reserve “Dot Plot”

Source: US Federal Reserve.

The Fed’s “Dot Plot” Shows 3 Rate Hikes Are Likely

The Fed’s dot plot shows that three rate hikes are expected next year. The dot plot is exactly what it sounds like: The FOMC members plot a dot to show how high they think rates will rise. Each dot is presented together and analysts use the breakdown to see where the commission is concentrated. This helps the market adjust to future expectations before the Fed actually makes a decision.

Ending bond purchases in March and 3 rate hikes next year is more than the market expected. This week marks the Fed’s second surprise in two months, which started to wind down last month. As a result of the aggressive tone, RBC sees the Fed making its first rate hike as early as the second quarter of 2022. That would be a quarter before an increase was previously expected.

“The Fed moving beyond market pricing is remarkable in the context of expectations for rate hikes in other jurisdictions well ahead of central bank guidance,” Nye said.

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