- New projections from the Fed show the 2022 economy featuring higher prices and faster hiring.
- Unemployment is now forecast to drop to 3.5% next year, down from the September forecast of 3.8%.
- The median inflation forecast for 2022, however, rose to 2.6% from 2.2%.
If Federal Reserve officials' latest forecasts are correct, the US economic recovery is going to run hot for a little while longer.
Policymakers at the central bank published new projections for the national economy on Wednesday, updating how they see the recovery progressing over the next three years. The last set of forecasts was published in September, meaning the Wednesday release is the first to incorporate the end of the Delta wave, the emergence of the Omicron variant, and inflation surging to its fastest year-over-year pace in nearly 40 years.
The updates all point to a faster — and more expensive — rebound over the next 12 months. The median forecast for the unemployment rate in 2022 fell to 3.5% from 3.8%, according to the Wednesday report. The new estimate matches the record-low rates seen before the pandemic hit. The 2023 and 2024 rates were left unrevised at 3.5%.
Growth is also expected to exceed the Fed's September estimates. Gross domestic product is now projected to grow 4% in 2022, up from the previous median forecast of 3.8%. That comes at the expense of a slightly weaker expansion the following year. The economy is estimated to grow 2.2% in 2023, down from the last forecast of 2.5%.
The hotter recovery won't be cheap. Though inflation is largely expected to peak in the fourth quarter of this year, the cooldown is now estimated to be slower. The Personal Consumption Expenditures price index — the Fed's preferred measure of US inflation — is seen climbing 2.6% in 2022, according to the median projections. That's up from the September forecast of 2.2%. The inflation measure is then expected to rise 2.3% in 2023, up from the prior estimate of 2.2% growth.
New policy actions unveiled by the central bank on Wednesday match the Fed's outlook for a hotter and pricier recovery. The Fed announced it would double the pace at which it rolls back its emergency asset purchases, setting the program up to completely end in March. The move opens the door for the Fed to more aggressively raise interest rates in 2022 as it looks to cool price growth.
The latest projections hint at just how aggressive that fight against inflation will get. The Fed's median forecast shows officials lifting rates three times in 2022 and another three times in 2023. Though the readings don't reveal specific plans for the Fed's future policy, they hint at the central bank taking action sooner to stamp out pandemic-era inflation.
"Economic developments and changes in the outlook warrant this evolution," Powell said Wednesday, later adding "the economy is so much stronger now."