Fed plans to raise interest rates as soon as March to cool down inflation



The Federal Reserve signaled Wednesday that it plans to start raising its benchmark interest rate as early as March, a key step in reversing the pandemic-era low-interest rate policies that have spurred growth. employment and growth but also escalate inflation.

With high inflation hitting consumers and businesses and unemployment steadily falling, the Fed also said it would phase out monthly bond purchases, which are intended to lower long-term interest rates. in March.

In a statement released after its latest policy meeting, the Fed “hopes it will soon be appropriate” to raise rates. Some members have long advocated low rates to aid recruitment.

Speaking at a news conference, Chairman Jerome Powell expressed his view, as he has said before, that keeping inflation under control is essential to a strong job market.

“We believe the best thing we can do to support the continued strength of the labor market,” said Powell, “is to foster a long-term expansion, and that will require price stability.” “.

The Fed on Wednesday also laid out guidelines it will follow after it decided to reduce its bond holdings by nearly $9 trillion, an amount that has more than doubled since the pandemic hit nearly two years ago. Some analysts expect the Fed to start doing so as soon as July, a move that will contribute to a tightening of credit.

The central bank’s actions will inevitably make a range of loans – from mortgages and credit cards to auto loans and business credit – more expensive over time. As a result, higher borrowing costs can slow consumer spending and hiring. The biggest risk is that the Fed’s abandonment of low interest rates could trigger another recession.

The central bank’s latest policy statement comes after dizzying volatility in the stock market as investors fear and uncertainty about the Fed’s reversal of low-interest rate policies, which have nurture the economy and the market for many years. . The broad S&P 500 index has fallen nearly 10% this month before recovering slightly on Wednesday.

High inflation has also become a serious political threat to President Joe Biden and congressional Democrats, with Republicans seeing rising prices as one of their attacks. their main office as they head towards the November elections.

However, last week, Biden said it was “appropriate” for Powell to adjust Fed policies. And Republicans approved of Powell’s rate hike plan, providing the Fed with rare bipartisan support for credit tightening.

The Fed’s bond purchases are aimed at lowering long-term interest rates to spur borrowing and spending. Many investors also see bond buying as boosting the stock market by pouring cash into the financial system.

Earlier this month, minutes from the Fed’s December meeting revealed that the central bank was considering reducing its bond holdings by not replacing maturing bonds – a more positive step than just ending purchases. . The impact of the reduction in the Fed’s bond reserves is not well known. But the last time the Fed raised interest rates and slashed its balance sheet was in 2018. The S&P 500 stock index fell 20% in three months.

By not displacing some of its bond holdings, the Fed will in effect reduce demand for Treasuries. This increases their yields and makes borrowing more expensive

Some analysts said they weren’t sure how large the impact on interest rates would be or how the Fed would rely on a balance sheet reduction to affect rates.

All of which means Fed Powell faces a delicate and even risky balancing act. If the stock market is engulfed by more turbulent falls, economists say, the Fed may decide to delay some of its credit tightening plans. Still, a modest drop in stock prices won’t sway the Fed’s thinking.

Some economists expressed concern that the Fed has gone too late to combat high inflation. Others say they worry that the Fed might act too aggressively. They argue that multiple rate hikes could unnecessarily slow down hiring. In this view, high prices largely reflect a troubled supply chain that the Fed’s rate hikes are powerless to fix.

This week’s Fed meeting comes against a backdrop of not only high inflation – consumer prices have risen 7% over the past year, the fastest pace in nearly four decades – but also an economy afflicted by a recession. another wave of COVID-19 infections.

Powell has admitted that he did not anticipate the existence of high inflation, having long expressed confidence that it would be temporary. The increase in inflation has extended to areas beyond those affected by supply shortages – apartment rents, for example – which suggests it can persist even after goods and parts circulate more freely.

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