Federal Reserve Raises March Rate Hike-Rate Hike

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At a press conference, Federal Reserve Chair Jerome Powell said the central bank’s interest rate setting committee was ready to raise interest rates at its meeting on March 15-16. “The economy no longer needs sustainable monetary policy support,” he said.

The central bank has approved the final round of asset purchases. This will end the stimulus by March.Officials continued deliberations at a two-day meeting When and how to shrink the Fed’s $ 9 trillion securities portfolioHas more than doubled since March 2020.

Federal Reserve Board Another one-page statement released It elaborated on the high-level principles to guide the process for “significantly reducing” their holdings.

Federal Reserve Board Reduce short-term interest rates to near zero As the coronavirus pandemic hit the US economy and caused financial market volatility and a severe, short-term recession, it began buying bonds in 2020 to lower long-term interest rates.

Staff Promises to keep interest rates near zero until inflation It was projected to be slightly above 2% until the labor market returned to levels consistent with maximum employment.

The Fed stated in a statement that these goals were effectively achieved. The central bank has also removed an important opening statement from the statement it has been using since March 2020 to suggest that it will actively support growth in an unprecedented pandemic.

Inflation has risen to 12-month readings, the highest in decades, due to strong demand for commodities and a shortage of intermediate goods such as semiconductors. Inflation in November rose 5.7% year-on-year using the Fed’s recommended gauge, easily surpassing the Fed’s initial target.

But it was the development of the labor market that provided greater urgency in recent weeks to accelerate plans to raise interest rates much faster than the Fed expected last summer.

A sharp rise in wages and a historic decline in the unemployment rate in the second half of last year —From 5.9% in June to 3.9% in December— It was also achieved that he led the authorities to declare their employment-related goals on Wednesday.

Fed focuses on rising interest rates

Wednesday’s Fed decision was often telegraphed. “It’s really time for us to start moving from these urgent pandemic settings to more normal levels,” Powell said. I told lawmakers earlier this month.. “It’s a long way from where we are to normal.”

The Federal Reserve faces the daunting task of dealing with high inflation with two different policy instruments. This could increase ammunition to slow the economy, but in the past it has caused market turmoil.

Powell and his colleagues have shown that the central bank will begin the process of reducing asset holdings sooner than after it stopped buying bonds in 2014. Also, reinvesting securities in new earnings could be faster than the Fed’s previous reduction in holdings in 2017.

The Federal Reserve said Wednesday that it wants to adjust the federal funds rate, the short-term benchmark rate, as a key way to respond to changes in the economic outlook. Authorities have indicated that after raising interest rates, they will reselect the path to eliminate asset holdings that run on pre-mapped schedules. However, this statement did not provide guidance on when the process would begin.

The prospect of rising interest rates and shrinking federal portfolios to reduce inflation has led to recent increases in market volatility, with investors enjoying the boom last year for some tech companies, cryptocurrencies and other risks. I started to sell the stock of an asset.

Brown’s fixed income and portfolio manager Tom Graf said the Fed’s turn to tighten policy was “arguably more advanced than a sudden revelation, and the reason the market received the message now is a bit confusing. “. Advisory.

Graf said the market is taking the Fed’s monetary tightening policy promises more seriously after suggesting that authorities have begun to consider plans to shrink its asset portfolio earlier this month. “In the case of your dissertation that a particular stock valuation makes sense because interest rates always remain very low, it was borrowing time,” he said.

For several months last year, Powell and his colleagues said they believed in high readings and didn’t need to raise interest rates to lower inflation. Mainly due to supply chain bottlenecks Other difficulties associated with the resumption of the economy.

Powell changed course in November and said central banks were concerned that inflation could settle. It has moved the point of rapidly advancing policy by the Fed’s standards, given that it prefers to move in measured steps to avoid the whiplash market.

Pivots reflect changes in the calculus on the potential for rising demand to push up prices such as wages and rents, which could continue to raise inflation even after bottlenecks and shortages of items such as cars and trucks have eased. doing.

Authorities emphasize the prospect that aggressive fiscal and monetary policy responses to pandemics will change the dynamics of traditional recessions and boost wage growth, which normally takes a long time to recover after a recession. increase.

Share your thoughts

What steps should the Fed take to deal with rising inflation? Join the conversation below.

The sharp rise in home prices, stocks and other assets has boosted the wealth of many Americans, fueled stronger demand, allowed some to retire faster than expected, and tightened the labor market. increase.

President Biden Nominated Mr. Powell for the second term As the Fed’s chief when his current one expires next week. Powell said in a confirmation hearing two weeks ago that he was surprised not only by the intensity of certain price pressures last year, but also by the decline in the number of Americans seeking employment despite the high availability of seats.

Powell said these labor shortages did not cause the current high inflation, but the decline in the labor force “may be more of an inflation issue than these supply chain issues. “.

Central bank officials last month Three-quarter percentage point rate hike this year And next year there are three more. They predicted an increase based on the prediction that inflation would fall below 3% by December and drop to just over 2% by the end of next year.

Still, some officials have emphasized that there is a great deal of uncertainty in that forecast, and investors are wondering how the Fed will do if inflation is expected to exceed 3% by the end of this year. I’m hungry for clues as to whether to react.

Write in Nick Timiraos at nick.timiraos@wsj.com

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Federal Reserve Raises March Rate Hike-Rate Hike

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