Signals Fed will raise rates soon, citing high inflation and strong job market

The Federal Reserve on Wednesday said it would be appropriate “soon” to raise interest rates, as inflation exceeded policymakers’ preferred target and the job market strengthened.

While central banks left interest rates unchanged near zero – where they have been since March 2020 – revised statement after their two-day policy meeting laid the groundwork for higher borrowing costs shortly after the Fed’s next meeting in March.

The Fed is slowing the bond-buying program it used to prop up the economy, and officials let that program end in March. Central banks have signaled that they may begin collecting Narrow balance sheet bond holdings soon after rate hikes start, a move that will further remove support from markets and the economy. The Fed’s policy committee released a statement of principles for that process on Wednesday, pledging to shrink its holdings “in a predictable manner” and “primarily” by adjusting reinvest when the asset expires.

Jerome H. Powell, Fed chair, is scheduled to hold a press conference starting at 2:30 p.m

Investors are anxiously watching the Fed’s next steps, concerned that the Fed’s policy changes will affect the prices of stocks and other assets and quickly slow the economy. At the same time, Consumer prices are rising at the fastest pace since 1982, eating away at household wages and placing political responsibility on President Biden and Democrats. The Fed’s job is to keep inflation in check and help promote full employment.

The Fed’s withdrawal of policy support could reduce consumer and business demand as it becomes more expensive to borrow money to buy a car, boat, home or business. Slowing demand could provide an opportunity for strained supply chains to catch up. By slowing hiring, the Fed’s moves could also limit wage growth, which could affect prices.

“With inflation 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 said in its statement.

The Fed has pivoted away from providing comprehensive support as the economy bounces back strongly from its pandemic shock.

The unemployment rate has down 3.9 percentdown from a peak of 14.7 percent during the worst economic times during the pandemic and near a February 2020 level of 3.5 percent. Wages are increasing at the fastest rate in decades, although they are struggling to keep up with the rapid rate of price increases.

Inflation picks up sharply in 2021 and is likely to remain uncomfortably high in 2022. Fed preferred inflation measure is expected to see prices rise 5.8% in the year to December when the latest report is released on Friday, more than double the 2% rate set by the Fed annually and on average. .

Expensive partly because of the global supply chain are struggling to produce and ship enough sofas, cars and clothing to keep up with the booming demand for goods. The pandemic has changed consumption patterns and households have money in their pockets thanks to long months at home and government bailouts.

By making it more expensive to buy a lawn mower on credit or a car with a car loan, the Fed’s rate hike could help cool US spending.

If the virus goes away, that will also help get things back to normal by allowing factories to run at full speed without shutdowns and by allowing consumers to spend money on trips to nail salon or the Alps instead on a new kitchen table and garage renovation.

But Fed officials — and many economists — spent much of 2021 hoping that conditions would return to normal and inflation would go away on its own. That didn’t happen.

Central banks continue to estimate that upside momentum will essentially fade later this year, but they have also steered policy into a position from where it can fend off any lingering inflationary pressures. .

Policymakers expected at their last meeting, in December, that they would increase interest rates three times This year. They did not issue a new set of economic projections with this policy statement. The next quarterly estimates will arrive in March. Signals Fed will raise rates soon, citing high inflation and strong job market

Fry Electronics Team

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