The Federal Reserve is preparing to raise interest rates, according to the central bank’s monetary policy update released on Wednesday morning. However, for the time being, rates were kept close to zero.
A statement from the Federal Reserve stated that “with inflation well above 2 percent and a strong labour market, the Committee expects it will be appropriate to raise the target range for the federal funds rate in the near future.”
During the press conference that followed, Fed Chairman Jerome Powell confirmed that March is most likely the most appropriate time frame to anticipate a rate hike.
His comments to reporters were interpreted as indicating that the committee is planning to raise the federal funds rate at its meeting in March, assuming that the conditions are favourable for doing so.
Investors, on the other hand, anticipate that timing: According to the CME FedWatch tool, market expectations for a rate increase in March increased to more than 95 percent following the Fed’s announcement, up from just below 90 percent before the announcement.
Inflation is causing discomfort.
Inflation continued to rise through the end of 2021, and economists anticipate that the cycle will reach its apex in the first few months of this calendar year.
Inflation as measured by the Federal Reserve’s preferred index of consumer spending increased to 5.7 percent in the 12 months that ended in November, the fastest increase in the index since July 1982. Powell went on to say that high prices are particularly difficult for Americans on fixed incomes and with limited resources.
At a press conference on Wednesday, Federal Reserve Chairman Jerome Powell stated, “Like the vast majority of forecasters, we continue to expect inflation to decline over the course of the year.” Less pressure on the battered global supply chains, as well as less stimulus from Washington, should help to alleviate this situation.
When the pandemic put the United States economy in a choke hold in March 2020, the central bank slashed interest rates to near zero. The Federal Reserve announced last month that it would raise interest rates on a number of occasions throughout 2022.
Powell, speaking to reporters on Wednesday, said it was pointless to try to predict when exactly these rate hikes will take place in 2022, or how large they will be. Powell refused to say whether or not a half-percentage point increase would be possible when asked about it.
According to him, “it is not possible to predict with much confidence exactly what path our policy rate will take in the future,” stressing that the central bank must be flexible and adaptable in its approach to the current economic environment.
Controlling one’s finances
In addition, the Fed announced the end of its pandemic-era stimulus in November and accelerated the rollback of its asset purchases the following month, both of which occurred in December.
The bank said on Wednesday that it would continue to reduce its monthly asset purchases until they were phased out in early March.
Following the completion of the stimulus programme and the beginning of the rate hike cycle, the Fed’s massive balance sheet will be reduced, which is the next item on its to-do list. In addition, the bank stated that it does not expect to begin concentrating on balance sheet reduction until after the rate hikes have begun. As a result, it appears to be any time after March.
In a statement, Wells Fargo Chief Economist Jay Bryson predicted that the Federal Open Market Committee (FOMC) would announce at its September policy meeting that it would begin balance sheet reduction in the fourth quarter.