By Howard Schneider

WASHINGTON (Reuters), – Wednesday’s announcement by the Federal Reserve that they are speeding up its end to pandemic-era bonds purchases will be made. It also signal a shift to higher interest rates next year in order to protect against inflation.

U.S. central banks have added uncertainty to their operations after the Omicron Coronavirus variant was identified last month. After steadily discounting its impact on economic performance, they now need to assess how this strain’s quicker spread might affect consumers, businesses and the trajectory of growth or inflation.

Reuters polled private forecasters and they still anticipate U.S. growth at nearly 4% in the next year. This is well above the trend. They are also aligned with expectations that Fed’s growing concern over inflation will lead it to end its bond-buying program – initially set at $120 million per month – in March, and plan multiple rate hikes for 2022. (Graphic: Fed vs. private GDP outlook, https://graphics.reuters.com/USA-FED/OUTLOOK/xegpbzyyqpq/chart.png)

After its last two-day meeting ends at noon EST (2000 GMT), the Fed will publish a new policy declaration and update economic projections. Half an hour after the meeting, Fed Chair Jerome Powell will host a news conference.

Omicron’s unknowns aside, U.S. unemployment has surpassed the Fed’s latest projections from September. This means that policymakers have to keep up with the direction of the markets and economy.

The policymakers’ new forecasts “will generally show lower projections for the unemployment rate and higher ones for inflation,” prompting quarter-percentage-point increases in the Fed’s short-term policy rate beginning in June, JPMorgan (NYSE:) economist Michael Feroli wrote in a note ahead of the meeting.

“We think it’s a close call between looking for two or three hikes in ’22, but think three is a little more likely,” Feroli wrote.

Powell’s news conference is going to be a focus on how the new renominated Annual U.S. Inflation runs at over twice the Fed’s flexible target of 2% Fed chief frames policy decision, risks and outlook for next year. It will also highlight whether Powell’s tone indicates more concern for inflation or the possible impact of Omicron variant.

There may be significant change to the central bank’s policy statement in either direction. Powell made this clear in his testimony to Congress recently. He said that it was “time for the Fed to retire its reference to inflation being “transitory”.

Fed officials anticipated that there would be an increase in prices over 2021. But instead of this, it’s remained at the same pace as inflation worries of late 1970s or early 1980s. This has led to a depressing of consumer sentiment, wage decreases, and firestorms from both major parties.

The Fed’s September 2020 test, in which it pledged not to increase interest rates until inflation exceeds 2%, has been passed by the Fed. It was also on track to keep the Fed above 2% for a while. (Graphic: Inflation, on average, https://graphics.reuters.com/USA-FED/FRAMEWORK/byvrjjmbkve/chart.png)

The price index for personal consumption expenditures (PCE), which is a key indicator of Fed inflation, increased more than 2% year-over-year in March. It then rose to 5% in Oct. However, there are no signs that the cost-fueling mixture of tight global supply chains, strong U.S. demands, or clogged global supply chain, will be changing anytime soon.

‘UNDER PRESSURE’

For months, investors have been expecting that the Fed will respond with higher interest rates in order to maintain stable prices. This is Congress’s main objective.

The main instrument policymakers have to achieve this is to increase borrowing costs. This can deter consumers from purchasing big-ticket items such as homes or cars and undercut asset value.

Investors expect the Fed to increase its overnight benchmark interest rate by 0.75 percent next year.

Fed has another mandated goal to preserve maximum employment. Current policy statements promise to hold interest rates constant “until the labor market conditions are at levels compatible with” it.

The U.S. may soon be at that level with a 4.2% unemployment rate.

The pandemic left deep scarring and has not completely healed. There are currently 4 million fewer payroll jobs than there were at the peak in early 2020. Health, childcare, and other issues may also be preventing people from returning to the workforce.

Powell could use his Wednesday news conference to help the market. He may also use it to rebut claims that Powell has sworn to tighten financial conditions and rate increases and will position the Fed to take action against inflation.

Aneta Markowska (NYSE: Jefferies) wrote last week that “The Fed clearly feels under pressure to act” in response to the higher inflation. However, it will likely “gently press back” on the most aggressive rate hike expectations. It may also tie its initial borrowing cost increase to continued progress in employment.