What conditions must be met before the Fed raises interest rates?

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The Federal Reserve Aims to Raise Interest Rates by the End of 2022, Contingent on Economic Recovery

The Federal Reserve anticipates the necessary conditions for raising its benchmark interest rate will be met by the end of 2022, signaling a potential shift in monetary policy. This move follows a period of unprecedented economic stimulus implemented to counter the effects of the COVID-19 pandemic. The central bank's decision hinges on achieving a robust labor market recovery and a moderation of inflationary pressures.
Achieving Maximum Employment is a Key Condition

A primary criterion for the Federal Reserve to consider raising interest rates is the attainment of what it defines as "maximum employment." This condition is expected to be met by the end of 2022, with projections indicating unemployment will fall to 3.8 per cent from 4.6 per cent in the preceding month. The economy is anticipated to recover over four million jobs lost during the pandemic, aligning with the Fed's assessment of full labor market participation.
Inflationary Pressures Are Expected to Subside

While current price pressures have been significant, the Federal Reserve forecasts that these will dissipate over time. The expectation is that imbalances within the labor market and global supply chains will adjust, preventing persistent upward pressure on prices and wages. Projections from the Fed's policy-setting committee in September indicated that a key inflation measure is expected to decrease to just over two per cent in the coming year, down from 3.7 per cent in the current year.
The Federal Funds Rate Was Previously Cut to Zero

In response to the economic crisis triggered by the pandemic in March 2020, the Federal Reserve drastically reduced its benchmark borrowing rate, the target range for the federal funds rate, to zero. This action was a measure to support the economy by making borrowing cheaper for businesses and consumers. The subsequent announcement to begin reducing bond purchases signals a gradual unwinding of this accommodative monetary policy.
Bond Purchases Are Being Reduced

As part of its strategy to normalize monetary policy, the Federal Reserve has announced its intention to reduce its monthly bond purchases. This process is set to continue until the program is completely wound down by the middle of the following year. This reduction in asset purchases is a step towards withdrawing the significant stimulus provided to the economy during the pandemic.

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What conditions must be met before the Fed raises interest rates?

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