Federal Reserve officials indicated Wednesday they are on track to raise interest rates in March, noting that inflation is running well above policymakers’ targets and labor market data suggest workers are in short supply. Huh.
Central bankers left rates almost unchanged at zero – where they have been set since March 2020 – but the statement after their two-day policy meeting laid the groundwork for higher borrowing costs “soon”. Fed Chairman Jerome Powell said officials no longer thought that the US’s rapidly recovering economy needed so much support, and confirmed that a rate hike is likely at the next central bank meeting.
“I would say that the committee is looking at raising the federal funds rate at its March meeting, assuming the conditions are appropriate for doing so,” Powell said.
Although he declined to say how much rate hikes are expected by officials this year, he said that this economic expansion was very different from previous ones, “high inflation, high growth, a very strong economy – and I think Those differences are likely to be reflected in the policy we implement.”
The Fed was already slowing down a bond-buying program it was using to bolster the economy, and the program is on track to end in March. Statements after the Fed meeting and Powell’s remarks indicated that central bankers may begin reducing their balance sheet holdings of government-backed debt soon after they begin raising interest rates, a move that will affect markets and the economy. support will be removed.
Investors are nervous over the Fed’s next steps, worried that its policy changes will hurt stock and other asset prices and sharply slow the economy. Wall Street shares gave up their gains, and Yields on government bonds rose As Powell said. The S&P 500 ended with a loss of 0.2%, having risen to 2.2% earlier. Yields on 10-year Treasury notes, a proxy for investor expectations for interest rates, jumped 1.87%.
The Fed has accelerated from boosting growth to preparing for a cooling off as businesses report widespread labor shortages and as prices in the economy – for rent, cars and sofas – climb. Consumer prices are rising at the fastest pace since 1982, eating up paychecks and creating a political obligation for President Joe Biden and Democrats. It is the job of the Fed to keep inflation under check and set the stage for a stronger job market.
“The Fed has completed its pivot from being patient to inflation panic,” Diane Swonk, chief economist at Grant Thornton, wrote in a research note to clients after the meeting. “The next step will be to raise rates.”
The withdrawal of policy support by the Fed could impact consumer and corporate demand as it becomes more expensive to borrow money to buy a car, boat, home or business. Slowing demand could give supply chains, which have been left behind during the pandemic, room to catch up. By slowing hiring, the Fed’s moves could also limit wage growth, which could otherwise feed into inflation if employers raise prices to cover higher labor costs.
Investors dashed their hopes for a rate hike after the meeting, and now the Fed is expected to raise rates five times this year based on market pricing and for the Fed’s policy rate to end the year between 1.25% and 1.5%. is estimated. And economists are increasingly warning that central bankers could move faster – perhaps raising borrowing costs at each successive meeting rather than leaving gaps, or increasing by half a percentage point instead of quarter-point moves that are more typical.
But Powell avoided being asked about the pace of rate hikes, saying it was important to be “polite and nimble” and “we are going to be led by the data that comes and the evolving approach.”
“He went out of his way not to commit to a predetermined course,” said Subhadra Rajappa, head of US rates strategy at Societe Generale. The lack of clarity on what happens next is “a setup for a volatile market.”
While interest rates are expected to rise in the coming years, most economists and investors do not expect them to return to anything like the double-digit levels in the early 1980s. The Fed estimates that its long-term interest rate could be around 2.5%.
Powell noted during his news conference that both areas the Fed is responsible for – promoting price stability and maximizing employment – had prompted the central bank to “constantly move away” from helping the economy so much.
“There are several million more job opportunities than there are unemployed people,” Powell said. “I think there’s plenty of room to raise interest rates without jeopardizing the labor market.”
The unemployment rate has fallen to 3.9%, down from its peak of 14.7% at the worst economic point of the pandemic and close to the February 2020 level of 3.5%. Wages are increasing at the fastest rate in decades.
At the same time, Powell said the problems driving inflation were “larger and longer-lasting” than officials expected, and added that the Fed was “attentive to the risk” that rapid wage increases could push prices up. Is.
The Fed’s preferred inflation gauge is expected to show that prices have risen 5.8% through December, when the latest report is released on Friday, more than double the pace of 2% annually and averaged by the Fed.
This article originally appeared in The New York Times.
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