Why the Fed will raise interest rates in 2022, and how soon consumers will feel hikes

Read the Full Transcript

• Judy Woodruff:

  Federal Reserve officials announced they are prepared to fight inflation with a series of interest rate hikes next year, suggesting it will begin earlier than they projected just months ago.

  The Fed's benchmark rate, which affects borrowing, lending and economic growth, has been near zero since the start of the pandemic, in an effort to boost the recovery.

  But, today, Fed Chair Jay Powell said there could be as many as three rate hikes next year, starting next spring, in an effort to cool persistent rising prices.

• Jerome Powell, Federal Reserve Chairman:

  High inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials, like food, housing and transportation.

  We are committed to our price stability goal. We will use our tools both to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched.

• Judy Woodruff:

  The Fed also announced that it will scale back even further its efforts to stimulate the economy though major bond purchases.

  For more on these moves and their potential impact, we turn to Julia Coronado. She is an economist at the University of Texas at Austin, the founder of the firm MacroPolicy Perspectives, and she is a former economist for the Fed.

  Julie Coronado, welcome back to the "NewsHour."

  This is a pretty dramatic announcement. Why is the Fed doing this?

• Julia Coronado, MacroPolicy Perspectives:

  Well, the message from Chair Powell today was, it's not just about inflation that has been running pretty high in recent months, but the labor market is really strong.

  The economy is basically running pretty hot. We have seen the unemployment rate drop substantially. We have seen really significant wage gains. Interest-sensitive sectors, like housing, are running really strong. So the economy doesn't need as much support for monetary policy as it once did.

  Despite all the turbulence from the ongoing waves of COVID, the economy is doing really well, and the Fed has concluded that it needs to start pulling back, start stepping away. It's not trying to kill the recovery. It's just trying to cool things off and, again, keep that inflation in check, as the clip you just played indicated.

• Judy Woodruff:

  So what effect is the increase in interest rates expected to have on the economy?

• Julia Coronado:

  Well, over time, as the Fed raises interest rates, consumers should see somewhat higher interest rates for mortgage loans, for car loans, and businesses should see maybe some tighter terms to obtain financing.

  We have seen really easy financial conditions in the last year, and so we should expect to see a bit tighter conditions and a little bit higher prices to obtain credit, in particular. So, it's those credit-sensitive sectors that the Fed would like to see cool down just a little bit.

• Judy Woodruff:

  And the other thing the Fed announced is, they are shrinking these monthly bond purchases. They are going to be doing this much faster than they had said.

  How is that going to affect the economy?

• Julia Coronado:

  Same channels.

  The bond purchases work by lowering, putting downward pressure on longer-term interest rates after they have lowered short-term interest rates to zero. So, as they back away from these purchases, we should see some of those longer-term interest rates move higher.

  And, also, there are spillovers to other areas of the financial markets. The stock market's been really — running really strong. We have seen a lot of you might call it froth in areas like cryptocurrencies. And that kind of sort of enthusiasm may seem — see some cooling as the Fed stops injecting liquidity into financial markets.

• Judy Woodruff:

  Are most analysts at this stage saying that these are the right moves at the right time, that — and the right pace?

• Julia Coronado:

  Yes, well, there's a lot of mixed views. And let's be clear. The uncertainty around even just next year continues to be really, really high, given the pandemic, given different calibrated potential outcomes for fiscal policy.

  So there's different views, . But the markets took the Fed's announcement actually, extraordinarily well, surprisingly well, given that they were unambiguously declaring the easing of policy is going to be in the rearview mirror soon.

  So there isn't really any indication from financial markets that the Fed is either tightening too soon or even really that it's tightening too late. So, right now, they're giving the Fed a lot of credibility. And there's no real indications of turmoil or concern that they're about to kill the recovery.

• Judy Woodruff:

  To what extent did you — you listened to the Fed chair today. To what extent did you hear him acknowledge that the Fed had been misreading the economy over the last year?

• Julia Coronado:

  Chair Powell was actually very forthcoming.

  And he's been pretty clear all along that this is an unprecedented economic environment. We have never been in a global pandemic. When it looked like the global economy was sliding into a depression, the Fed and fiscal policy-makers threw everything they had at it.

  And the other side of that may be that we have got a recovery that's a little hotter than they anticipated. And so they're recalibrating policy accordingly. But he's been very clear that they don't have any magic wand. They don't have a crystal ball. They're reading things as best as they can.

  Part of the idea that inflation was going to be transitory was that so much of it has come from supply chain disruptions, things like semiconductor shortages that have pushed car prices higher, rather than sort of wages and a broad base of prices.

  That dynamic is shifting a little bit, and that's one of the reasons that they have shifted strategy a little bit. So they're going to continue to be very flexible as we move forward, given the uncertainty. Things can — the economy can involve in — evolve in unanticipated ways.

  And they will be there to recalibrate policy accordingly, with the ultimate objective of a long, stable expansion, like we had last time.

• Judy Woodruff:

  And we heard him say — use that word stable, stability.

  Finally, how soon should consumers who are listening to this and watching expect to feel that things are changing?

• Julia Coronado:

  Well, it's going to be a gradual process. So they have sped it up, but they're still indicating three rate hikes for next year.

  That means it could come — they're going to end their bond purchases in March. So we could see rate hikes in June. Maybe June, September and December would be a reasonable baseline expectation. So you could start to see rates creeping higher over the next year.

  So, again, this is not a ripping off the Band-Aid. This is a gradual, more methodical removal of accommodation that consumers will feel over time.

• Judy Woodruff:

  Julia Coronado, thank you very much.

• Julia Coronado:

  My pleasure.