Borrowing Costs To Increase As Fed Leaves Interest Rates Unchanged

Policymakers at the United States Federal Reserve have voted unanimously to leave interest rates at status quo at the end of their two-day meeting on Wednesday.

The Fed indicated that it is committed to using every tool available to support the recovery of the U.S. economy by buying bonds at $30 billion per month, CNBC reports.

Therefore, as the U.S. central bank aggressively dials back its monthly bond buying which comes sooner than had earlier been planned. This in the wake of inflation reaching its 30-year high and a continued show of sharp consumer price increases.

Whereas the Federal Reserve left the interest rates unchanged on Wednesday, the aggressive tapering of bond purchases points to inevitable hike in interest rates next year.

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Interest Rates To Increase

Meanwhile, Fed will be buying $60 billion of bonds from the beginning of next year. This is half of what it was buying just before the November taper. Note that the Fed was tapering by $15 billion monthly in November, and going by the latest news, this amount has doubled tin December. The Fed hopes to fast-track the reduction even further in 2022.

After all this, maybe sometime around late winter or early spring next year, it is expected that the central bank will then start increasing interest rates. And going by the predictions by Fed officials on Wednesday, there might be no less than 3 interest rates increases in 2022 alone, with two more in 2023, and another two in 2024.

The federal funds rate is set by the central bank as represents the rate at which banks borrow and lend to one another overnight. While this is not the rate that consumers pay, the move by the Federal reserve still affects the borrowing and saving rates they see every day.

According to Yiming Ma, an assistant finance professor at Columbia University Business School, “Reducing the purchase of long-term assets is going to likely reflect a faster increase of long-term interest rates and that should affect borrowing and saving.”

The Fed low borrowing rates have been at historically low levels which have made it easier for borrowers to access loans at cheaper costs making it less desirable for lenders to hoard cash.

However, the FED’s easy money policies are a coming to an end and so are the days of rock-bottom rates.

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