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Federal Reserve officials have indicated that they expect to raise interest rates three times next year as part of a major pivot by the U.S. central bank that signals a heightened focus on reining in inflation.

The projection was delivered on Wednesday alongside a monetary policy decision that accelerated the end of the Fed’s massive purchases of government assets, which it has used to hold down interest rates since the beginning of the pandemic. Fed officials decided to double the speed of central bank “tapering,” putting it on track to stop expanding its balance sheet by the end of March, and opening the door for interest-rate increases in the second quarter – much sooner than financial analysts had expected.

The developments move the Fed closer to the Bank of Canada in terms of tightening monetary policy, which has kept interest rates ultralow in both countries. Both central banks are dealing with a painful run-up in consumer prices that has forced them to backtrack on their description of high inflation as “transitory” and prepare for a rapid succession of rate hikes starting next year.

The annual rate of inflation in the United States hit 6.8 per cent in November, the fastest rise in consumer prices since 1982. Statistics Canada reported on Wednesday that Canadian inflation remained at 4.7 per cent in November, the same as the previous month.

The strength and persistence of consumer price growth has caught central bankers around the world by surprise and made their policies of maintaining rock-bottom rates look increasingly out of touch. The Bank of Canada has said it expects to start raising rates in the middle quarters of next year, perhaps as early as April.

“Inflation is elevated, it is well above our target, and we are not comfortable with where we are,” Bank of Canada governor Tiff Macklem said on Wednesday after a speech on the central bank’s new inflation-targeting framework.

To date, the Fed has been more patient than the Bank of Canada in tightening policy. That’s despite the fact that inflation is higher in the United States than in Canada and wages are rising rapidly, fuelling fears of wage-price spirals, in which rapid increases in wages and prices reinforce one another.

Canadian inflation hits 30-year high as Omicron threat looms

New Bank of Canada mandate could lead to more ‘patient’ raising of interest rates under certain circumstances, Macklem says

Wednesday’s announcement from the Fed suggests that both central banks will move at about the same pace with rate hikes, said Josh Nye, senior economist with the Royal Bank of Canada. This could make it easier for the Bank of Canada to raise rates – moving its rates well ahead of the Fed could push up the Canadian dollar, making exports less competitive.

“The Bank of Canada is always going to be cognizant of what the Fed’s doing with monetary policy in the U.S.,” Mr. Nye said. He added that longer-term interest rates in Canada are heavily influenced by rates in the United States, “so they’re certainly keeping an eye on what the Fed is doing.”

The Bank of Canada left its monetary policy unchanged last week. But comments by Mr. Macklem and deputy bank governor Toni Gravelle since then suggest the bank’s governing council is also mulling a change for its rate-decision meeting in January.

The bank ended its government bond-buying program, known as quantitative easing (QE), in October. It has maintained its forward guidance around the timing of interest-rate hikes, promising not to move until slack in the economy is absorbed, meaning it is operating at full potential. It sees this happening in the middle quarters of next year.

“We ended QE, so that is putting the focus on when we are going to remove our exceptional forward guidance and raise interest rates,” Mr. Macklem said on Wednesday. “We are looking at and assessing the diminishing degree of slack in the economy; and we’re focused on bringing inflation sustainably back to target.”

For the Fed and the Bank of Canada, a key factor arguing for rate hikes is the improving job market. Fed chair Jerome Powell said on Wednesday that the United States is “making rapid progress toward maximum employment.”

Mr. Macklem on Wednesday noted that “there’s no question, to a significant degree, the slack in the market has been absorbed.”

The employment rate in Canada is above the prepandemic level, and the unemployment rate, which hit 6 per cent in October, is within striking distance of where it was in February, 2020.

Mr. Nye of RBC said the Bank of Canada will likely either change its forward guidance in January to say it expects rate hikes in the first half of 2021, or drop the forward guidance altogether.

“The one thing that’s sort of giving me pause on whether the bank would actually make that shift in January is the uncertainty around Omicron,” he said.

Mr. Macklem’s speech on Wednesday was mostly about the central bank’s new mandate, which will guide monetary policy for the next five years. On Monday, the federal government directed the bank to continue aiming to keep inflation around 2 per cent, within a range of 1 per cent to 3 per cent, and to use its monetary policy to support “maximum sustainable employment” when “conditions warrant.”

Mr. Macklem suggested the time to focus on full employment is when inflation is under control and interest rates are more normal. This indicates the new language on employment would have little impact on the bank’s decisions to raise rates in the coming months.

“This new mandate does not change our current approach to monetary policy. Through this whole crisis, we’ve been very focused. Inflation has been our beacon,” he said.

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