Fed points to a rate hike in March in the face of rising inflation
The US Federal Reserve (Fed) has not moved interest rates yet, although it hopes to do so in March. Fed Chairman Jerome Powell said that “the committee intends to raise rates at the March meeting, assuming conditions are right to do so.”
Still, he said it is not possible to predict “exactly” what the monetary policy roadmap will be and they continue “with their eyes on all the risks.”
After their first meeting of the year, the members of the Federal Open Market Committee (FOMC) agreed to keep rates between 0% and 0.25% and stated that “with inflation well above 2% and a strong labor market, the Committee hopes that it will soon be appropriate to raise the target range.” In this way, the market’s expectation that it will do so in March is maintained, given the high inflation that marks maximums since 1982 in the country.
The market awaited the Fed’s decision with uncertainty, fearing that the change in direction would penalize economic growth and cause a new recession. Powell has ruled out this scenario in the face of a buoyant labor market that he believes has enough room to raise interest rates without a negative impact. The statement issued after the two-day FOMC meeting highlights that “job creation has been strong in recent months and the unemployment rate has declined substantially.”
However, it acknowledges that “supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to high levels of inflation.”
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The inflation rate in the country in the month of December reached 7%, maximum for 40 years, while unemployment is close to 4%. In that sense, Powell indicated that “the economy no longer needs sustained high levels of support from monetary policy.” In addition, he added that “most FOMC participants agree that labor market conditions are consistent with maximum employment and that is my personal opinion.”
Despite not specifying exact dates, Powell has confirmed the order of the measures to combat inflation. First, the asset purchase program will conclude. The Fed decided to continue reducing the monthly rhythm of its net purchases, to finalize them at the beginning of March. As of February, the Committee limits purchases of Treasury bonds to $20 billion per month and purchases of mortgage-backed assets to $10 billion per month. In total, purchases of assets worth $30 billion per month, compared to the $120 billion that was initially launched to buy when the pandemic broke out.
Since the asset purchase program will end in March, the central bank will be free to adjust the cost of credit. In addition, Jerome Powell confirmed that once the asset purchase program is over, they will begin to reduce their balance sheet in an “orderly” manner. In the press conference after the meeting, he explained that the quantitative adjustment will be carried out “in a predictable way, mainly through adjustments in reinvestments,” Powell said.
The balance of the Federal Reserve reaches $8.7 trillion.