The Federal Reserve signaled its intention to raise interest rates in March, the first hike since 2018, underscoring the Federal Reserve’s abrupt pivot to tackle rampant inflation rather than protect the economy from the pandemic.
The Federal Open Market Committee on Wednesday noted the strong economic recovery and “solid” job growth in recent months, laying the groundwork for swift monetary tightening to dampen demand.
In a press conference following the FOMC’s two-day meeting, Fed Chairman Jay Powell said, “Given the remarkable progress we’ve made in the labor market and a well above our . . . The aim is that the economy no longer needs sustained high levels of monetary policy support.”
He added, “The committee intends to raise the federal funds rate at the March meeting, provided conditions are appropriate.”
The central bank had promised to keep its main policy rate at its lowest level – where it has been for two years – until peaking at employment and inflation, which averages 2 percent over time.
The inflation target was met last year and the Fed noted on Wednesday that the unemployment rate, now hovering at just under 4 percent, had fallen “significantly”.
“I would say that most FOMC attendees agree that labor market conditions are consistent with maximum employment. . . and that’s my personal opinion,” Powell said.
The Fed also confirmed on Wednesday that it would end its bond-buying program, with purchases ending in early March.
The Fed’s move toward tighter monetary policy comes at a time of extreme volatility for financial markets, with US stocks teetering in recent days as investors rushed to position for a more hawkish stance from the central bank.
In the weeks leading up to the January meeting, several Fed officials signaled support for a March “hike” in interest rates, citing underlying strength in the US jobs market and inflation at its fastest pace in about four decades.
The FOMC and other regional industry presidents last month called for a three-quarter-point hike in 2022, three more in 2023, and two more in 2024. At the time, they forecast core inflation to ease to 2.7 percent by the end of the year from the current 4.7 percent and the unemployment rate to fall to 3.5 percent.
In recent weeks, however, Fed officials and Wall Street economists have said a more aggressive rate hike cycle with four or more hikes this year could be warranted. If inflation doesn’t ease, it could lead to rate hikes in March and at each of the following six meetings this year, some economists say.
There is also debate about how the Fed will manage its balance sheet of around 9 trillion.
The Fed held further deliberations at this week’s meeting and released a set of principles on its approach to reducing its balance sheet.
No decision has been made on how quickly the reduction will come or when it can begin, but officials agreed it would come in a “predictable manner”.
They previously agreed that the “run-off” should be faster than an attempt to reduce inventories in 2017, when the balance sheet was about $3.7 trillion.
The 2017 episode ended in acute financial market stress – with short-term borrowing costs made apparent when it became apparent that too much cash had been withdrawn from the financial system.
A sell-off in US financial markets was sparked again as Powell spoke, with traders pointing to relatively hawkish comments on a decline in both US stocks and sovereign debt. The yield on the two-year government bond, which moves with interest rate expectations, climbed to 1.09 percent, the highest since February 2020. Yields rise when a bond’s price falls.
The US stock market also slipped, with the S&P 500 giving up a 2.2 percent gain earlier in the day to trade 0.7 percent lower. The tech-heavy Nasdaq Composite fell 0.4 percent, reversing a rally of up to 3.4 percent earlier in the trading session.
Traders in overnight funding markets, which had priced in a quarter-point rate hike in March, also began raising expectations that the Fed could raise rates more than four times this year.
Additional reporting by Kate Duguid
