The Federal Reserve is getting ready to raise interest rates, the central bank said in its monetary policy update Wednesday. But it kept rates near zero for now.
“With inflation well above 2% and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate,” the Fed statement read.
During the subsequent press conference, Fed Chairman Jerome Powell confirmed that March is probably the right time frame to anticipate.
“I would say the committee is of a mind to raise the federal funds rate at the March meeting, assuming that conditions are appropriate for doing so,” he told reporters.
Investors expect that timing, too: Market expectations for a rate increase in March climbed above 95% following the Fed announcement, from just below 90% before, according to the CME FedWatch tool.
Inflation pains
Inflation continued to climb into the end of 2021 and economists expect to see the peak of this cycle in the early months of this year.
The Fed’s preferred measure of inflation rose to 5.7% in the 12 months ended in November, the fastest increase in the consumer spending price index since July 1982. High prices are particularly challenging for Americans on fixed and lower incomes, Powell added.
“Like most forecasters we continue to expect inflation to decline over the course of the year,” said Fed Chairman Jerome Powell during Wednesday’s press conference. Less pressure on the battered global supply chains and less stimulus from Washington, should help with that.
The central bank slashed rates to near zero in March 2020 when the pandemic put the US economy into a choke hold. Last month, the Fed signaled it would hike interest rates multiple times throughout 2022.
But there’s not much sense in trying to guess when exactly these rate hikes will happen in 2022, nor how big they will be, Powell told reporters Wednesday. When asked whether a half-percentage point increase would be possible, Powell refused to commit either way.
“It is not possible to predict with much confidence exactly what path for our policy rate is going to prove appropriate,” he said, stressing that the central bank needed to be flexible and adaptable in its approach.
Money management
In November, the Fed also announced the end of its pandemic-era stimulus and accelerated the roll-back of its asset purchases the following month.
The bank will continue reducing its monthly asset purchases and end them in early March, it said Wednesday.
After the end of the stimulus program and liftoff in interest rates, reducing its massive balance sheet is next up on the Fed’s to-do list. The bank affirmed that it only expects to start focusing on balance sheet reduction after the rate hikes have begun. So that seems to mean any time after March.
“We expect that the FOMC will announce at the September policy meeting that it will begin balance sheet reduction in the fourth quarter,” said Wells Fargo chief economist Jay Bryson.