The US Federal Reserve has signalled it may start raising its benchmark interest rate sometime next year, earlier than it envisioned three months ago and a sign that it is concerned that high inflation pressures may persist.
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The US central bank announced its widely expected decision to keep the target range for the federal funds rate at 0 to 0.25 per cent.
In a statement, the Fed also said it will likely begin slowing the pace of its monthly bond purchases "soon" 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 dialling back the extraordinary support it provided after the coronavirus paralysed 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 US central bank to pull back.
The economy has recovered faster than many economists had expected although growth has slowed recently as COVID-19 cases have spiked and labour and supply shortages have hampered manufacturing, construction and some other sectors.
The US economy has returned to its pre-pandemic size and is thought to be growing at a solid 4.0 per cent 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 per cent in July from a year ago - the sharpest such increase since 1991.
In its updated quarterly projections, Fed officials now expect to raise their key short term rate once in 2022, three times in 2023 - one more than they had projected in June - and three times in 2024.
That benchmark rate, which influences many consumer and business loans, has been pinned near zero since March 2020 when the pandemic erupted.
Before it starts raising rates, though, the Fed expects to begin paring, or tapering, its monthly bond buying.
The central bank had signalled last year that it would likely start tapering its $US120 billion ($A165 billion)-a-month in purchases of Treasurys and mortgage bonds once the economy had made "substantial further progress" toward the Fed's goals of maximum employment and 2.0 per cent average annual inflation.
"If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted," the Fed said in a statement issued after its two-day meeting ended on Wednesday.
Taken together, the Fed's pullback in bond purchases and its eventual rate hikes, whenever they happen, will mean that some borrowers will have to pay more for mortgages, credit cards and business loans.
Australian Associated Press
