FOMC delivered a hawkish outlook at the December meeting. Besides doubling the size of tapering as we had anticipated, more than two-third of the members have projected at least 3 rate hikes next year. The latest economic projections suggest that inflation could rise to +5.3% this year before easing. Both headline and core CPI are expected to stay above +2% through to 2024.

The central bank acknowledged that the improvement in the job market had been “solid” and the unemployment rate “declined substantially” in recent months. They, however, warned of the risks “from new variants of the virus”. The Fed dropped the term “transitory factors” in its characterization of inflation. It suggested that supply and demand imbalances “continued to contribute to elevated levels of inflation”. Moreover, the reference that inflation had “run persistently below” 2% was dropped and replaced by the acknowledgement that inflation has “exceeded 2% for some time”.

Against the backdrop the staff economic projections saw some changes. The forecasts of unemployment rate for this year and next year have been revised lower to 4.3% and 3.5%, from 4.8% and 3.5% respectively. Both headline and core inflation rates have been upgraded sharply. Inflation is expected to rise to +5.3% this year, before easing to +2.6% and +2.3% in 2022 and 2023, respectively. Core CPI is expected to rise to +4.2% this year. On the economic growth, GDP is projected to reach +5.5% y/y in 2021, compared with +5.9% in September’s projection.

On the monetary policy, the Fed would double the pace of tapering to US$30B/ month in January, in light of elevated inflation pressure and the resilient job market. The Fed funds rate was kept unchanged at 0–0.25% at the December meeting. The members have upgraded their rate hike projections. The median dot plots indicate that there would be three rate hikes in both 2022 and 2023, followed by two more in 2024. It’s striking to see that two-thirds of the members projected 3 or more hikes next year.