The Federal Reserve has signaled that the first interest rate hike in years is on the horizon as it moves to leave its pandemic crisis posture and limit inflation.
The Federal Open Market Committee released its decision Wednesday after a two-day monetary policy meeting. The central bank said in a statement that “it will soon be appropriate to raise” its interest rate target.
Bond markets reacted to Wednesday’s announcement by raising the implicit odds of a rate hike in March to 95%.
Economists and investors have been eagerly awaiting news on when the central bank will decide to start raising rates from the near-zero level they have been at since the outset of the COVID-19 pandemic. The last time interest rates were hiked was in 2018.
The Fed also announced Wednesday that its asset-purchasing program will end at the beginning of March.
“The economy no longer needs sustained high levels of monetary policy support,” Fed Chairman Jerome Powell said during a post-meeting press conference.
“That is why we are phasing out our asset purchases and why we expect it will soon be appropriate to raise the target range for the federal funds rate,” he said. “Of course, the economic outlook remains highly uncertain. Making appropriate monetary policy in this environment requires humility, recognizing that the economy evolves in unexpected ways.”
While employment still has not reached pre-pandemic levels, the Fed has messaged, with increasing urgency, that it will have to tighten its monetary policy to combat inflation, which has grown far worse than most forecasters had thought. In a Wednesday statement, the Fed acknowledged that inflation is now running “well above” the target range of 2%.
Inflation, as gauged by the consumer price index, has risen from an annual rate of 2.6% in March of last year to 7% in December, the fastest pace since 1982. The high inflation has signaled to the central bank that its efforts to boost spending in the wake of the pandemic were left in place too long. It also has damaged President Joe Biden’s approval ratings and undercut his efforts to enact new major spending measures.
BIDEN INFLATION AND ECONOMIC WOES UNLIKELY TO BE FIXED IN TIME FOR MIDTERM ELECTIONS
The Fed has been tapering its massive monthly asset purchasing program for weeks now. The central bank had previously been buying $120 billion of Treasury and mortgage securities each month. After that program ends, the Fed will be looking at how to shrink the balance sheet — a process that the Fed on Wednesday said would not begin until the first interest rate hikes happen.
Wednesday’s news comes as investors fret about higher interest rates. Investors are retreating from assets such as equities amid anxiety about the Fed raising interest rates and uncertainty about the geopolitical situation in Ukraine.
During the FOMC’s last meeting, participants indicated about three rate hikes during 2022 as a means of combating inflation. After that meeting, though, investors began to expect the Fed to take on an even more aggressive monetary policy in order to tamp down price increases.
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The unemployment rate is 3.9%, although the country is still millions of jobs short of where it was right before the global health crisis took hold. Many employers have complained of a labor shortage and are struggling to hire and retain workers. Powell said on Wednesday that improvements in labor market conditions have been “widespread.” He said he personally sees the United States at full employment.
“Most FOMC participants agree that labor market conditions are consistent with maximum employment,” he said.
Additionally, about 4.5 million workers quit their jobs in November, up from 4.2 million the month before. The number of people quitting is the highest since the country began keeping records of the statistic about two decades ago and is equivalent to about 3% of the workforce.
