Fed likely to hike rates in March as Powell vows sustained inflation fight

  • Powell says central bank should raise rates in March
  • Fed chief says inflation hasn’t improved since December
  • US stocks reverse course to end mostly lower

WASHINGTON, Jan 26 (Reuters) – The Federal Reserve said on Wednesday it is likely to raise interest rates in March and reaffirmed its intention to end its bond purchases that month as part of what US central bank chief Jerome Powell has promised a sustained battle to get inflation under control.

“It is the committee’s view to increase the federal funds rate at the March meeting assuming conditions are appropriate to do so,” Powell said at a news conference, pinning a policy statement from the The central bank’s Federal Open Market Committee which only said rates would rise “soon”.

Further interest rate hikes and a possible reduction in Fed holdings would follow as needed, Powell said, as officials monitor how quickly inflation is falling from current multi-decade highs to the 2-year target. % of the central bank.

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Much remained undecided, he told reporters after the end of the Fed’s latest two-day policy meeting, including the pace of further rate hikes or how quickly authorities will let its balance sheet decline massively. .

But Powell was explicit on one key point: that with inflation high and for now apparently getting worse, the Fed plans this year to gradually tighten credit and end the extraordinary support it has supplied to the US economy during the coronavirus pandemic.

Since the Fed’s last policy meeting in December, Powell said, inflation “hasn’t gotten any better. It’s probably gotten a little worse…To the extent that the situation deteriorates further, our policy will have to take it into account”.

“It will be a year in which we gradually move away from the very accommodative monetary policy that we have put in place to deal with the economic effects of the pandemic,” he added.

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STOCKS FALL AGAIN

U.S. stocks, battered to start the year on worries about how quickly the Fed might act to contain inflation, slid as Powell repeatedly pointed to the underlying strength of the economy and the persistence of inflation, and refused to rule out more aggressive tightening if necessary.

The S&P 500 Index (.SPX), at one point in the day up more than 2%, sold off sharply during Powell’s press conference to close down 0.15%. The Nasdaq Composite (.IXIC), which had taken a hit in this month’s selloff, ended the day little changed.

Yields on longer-dated Treasury securities, sensitive to the Fed’s balance sheet policy, rose as Powell signaled a decision would soon be made on when to start trimming the portfolio by more than $8 trillion. US government bonds and central bank mortgage-backed securities (MBS). The dollar jumped 0.5% to its highest level in a month against a basket of currencies from key trading partners.

Federal Reserve Chairman Jerome Powell delivers remarks on a screen as a trader works on the floor of the New York Stock Exchange (NYSE) in Manhattan, New York, U.S., December 15, 2021. REUTERS /Andrew Kelly/File Photo

Powell was “trying to balance the fear factor, but at the same time he was talking about inflation possibly getting worse, he was talking about the Fed might have to use more tools, he was talking about shrinking the balance sheet,” he said. said Peter Cardillo, chief market economist. with Spartan Capital Securities in New York. “Ultimately, his response makes the market fearful of uncertainty.”

The breadth of Fed policy away from tackling the economic fallout from the pandemic and toward tackling inflation will take more shape in the weeks ahead.

That will depend on how inflation itself behaves, and Powell said officials still hoped much of the improvement would come as aftershocks from the pandemic wane, perhaps allowing them to do less work thanks to a tighter monetary policy.

A myriad of risks remain, ranging from an ongoing pandemic to a potential Russian-Ukrainian military conflict.

But Powell said policymakers believe at this point they have “some leeway to raise interest rates” without threatening jobs progress or slowing the economic recovery they want to keep underway. .

In a refrain that has become commonplace, he noted that “the economy is quite different” from when the Fed last started raising interest rates in 2015, with higher inflation, lower unemployment and what Powell sees it as enough momentum to make headway without the Fed. to help.

In this shift to tighter policy, the Fed moved at an initially glacial pace, with a rate hike of a quarter of a percentage point in 2015 and only another in 2016.

Investors are expecting a lot more this time around, with federal funds futures pricing predicting four rate increases this year. The Fed’s benchmark overnight interest rate is currently set near zero.

FOMC members also agreed at this week’s meeting on a set of principles to “significantly reduce” the size of the Fed’s holdings. Officials said they would reduce holdings “primarily” by limiting the share of maturing bond principal that the Fed would reinvest each month. That plan would begin after interest rates take off, the central bank said, without yet setting a definitive date, pace or size.

Over time, the Fed’s balance sheet would not only be reduced, but shifted from MBS and weighted to US Treasuries, “thereby minimizing the effect of Federal Reserve holdings on the allocation of credit between sectors of the economy,” the central bank said.

The Fed statement, moving forward with a monetary policy tightening plan, cited “solid” recent job gains that have continued even as the outbreak of the Omicron variant of the coronavirus has pushed the number of daily cases to record highs. While the Fed has stopped trying to gauge when inflation might subside, the statement says officials continue to expect improvements in global supply chains to slow the pace of price increases. .

“Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to high levels of inflation,” the Fed said, with consumer prices rising at a rate annual rate of 7%, the highest level since the 1980s.

Policymakers did not release new economic and interest rate projections on Wednesday.

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Reporting by Howard Schneider and Jonnelle Marte Editing by Paul Simao

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