New York is a city in the United States (CNN Business) - Federal Reserve is preparing to hike interest rates, according to the central bank's monetary policy update released on Wednesday. For the time being, though, rates have remained near zero.
"With inflation well above 2% and a healthy labor market, the Committee anticipates it will be appropriate to raise the federal funds rate target range soon," the Fed said in a statement.
During the press conference that followed, Fed Chairman Jerome Powell confirmed that March is the most likely timeframe to expect.
"I would say the committee is leaning toward raising the federal funds rate at the March meeting, providing conditions are favorable," he told reporters.
Investors anticipate the same timing: According to the CME FedWatch tool, market expectations for a rate hike in March soared beyond 95% following the Fed statement, up from slightly below 90% previously.
Pains from inflation
Inflation continued to rise through the end of 2021, with economists predicting the cycle's apex in the first few months of this year.
In the 12 months ended in November, the Fed's favoured gauge of inflation surged to 5.7%, the largest increase in the consumer spending price index since July 1982. High prices are particularly difficult on Americans on fixed or low incomes, according to Powell.
During a news conference on Wednesday, Fed Chairman Jerome Powell said, "Like most forecasters, we continue to expect inflation to decrease over the rest of the year." Less strain on the world's shattered supply systems, as well as less support from Washington, could assist.When the epidemic put the US economy in a chokehold in March 2020, the central bank lowered rates to near zero. The Federal Reserve announced last month that it would raise interest rates multiple times in 2022.
But, as Powell told reporters on Wednesday, it's pointless to try to predict when these rate hikes will take place in 2022 or how large they will be. Powell refused to commit either way when asked if a half-percentage-point hike was possible.
"It's impossible to say with much certainty what route for our policy rate will be suitable," he added, emphasizing the necessity for the central bank to be flexible and adaptable in its approach.
Management of funds
The Fed also declared in November that it would stop its pandemic-era stimulus and speed the rollback of its asset purchases the following month.
The bank stated Wednesday that it would continue to reduce its monthly asset purchases until they are phased out in early March.
Following the end of the stimulus program and the rise in interest rates, the Fed's large balance sheet will be reduced. The bank stated that it would only begin focusing on balance sheet reduction once rate rises have started. So, any time after March, it appears.
"We expect the FOMC to declare in September that it will start reducing its balance sheet in the fourth quarter," said Jay Bryson, chief economist at Wells Fargo.