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Home›Bank Apr Uk›The Fed is about to raise interest rates

The Fed is about to raise interest rates

By Laura Wirth
January 26, 2022
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“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 said.

In the press conference that followed, Fed Chairman Jerome Powell confirmed that March was probably the right time to anticipate.

“I would say the committee is of the view that the federal funds rate should be increased at the March meeting, assuming the conditions are appropriate to do so,” he told reporters.

Investors are also anticipating this timing: Market expectations for a March rate hike topped 95% after the Fed’s announcement, from just under 90% previously, according to CME tool FedWatch.

Inflation pains

Inflation continued to climb until the end of 2021 and economists expect to see the peak of this cycle in the first months of this year.

The Fed’s preferred measure of inflation rose to 5.7% in the 12 months to November, the fastest rise in the consumer expenditure price index since July 1982. High prices are particularly difficult for Americans on fixed and low incomes, Powell added.

“Like most forecasters, we continue to expect inflation to decline over the year,” Fed Chairman Jerome Powell said at Wednesday’s press conference. Less pressure on struggling global supply chains and less stimulus from Washington should help.

The central bank cut rates to near zero in March 2020 when the pandemic put the US economy in a chokehold. Last month, the Fed announced that it would raise interest rates multiple times throughout 2022.

But there’s not much sense in trying to guess exactly when those rate hikes will happen in 2022, or how big they will be. Powell told reporters on Wednesday. When asked if a half-percentage-point raise would be possible, Powell declined to commit one way or the other.

“It is not possible to predict with much confidence exactly which trajectory for our policy rate is going to turn out to be 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 pullback in its asset purchases the following month.

The bank will continue to scale back its monthly asset purchases and end them in early March, it said on Wednesday.

After the end of the stimulus program and the rise in interest rates, shrinking its massive balance sheet is the next step on the Fed’s to-do list. The bank said it expects to start focusing on balance sheet reduction only after the rate hikes begin. So that seems to mean anytime after March.

“We expect the FOMC to announce at the September policy meeting that it will begin to reduce its balance sheet in the fourth quarter,” Wells Fargo chief economist Jay Bryson said.

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