Interest rates

Fed announces interest rate hike ‘soon’

WASHINGTON — The Federal Reserve said Wednesday it would be “soon” time to start raising interest rates, a key step to reversing pandemic-era policies that have fueled hiring and growth, but also high inflation.

Economists expect the Fed to raise its benchmark short-term rate from zero as early as March, when it also plans to phase out monthly bond purchases to anchor longer-term rates.

President Jerome Powell told a press conference that these actions will help prevent high inflation from taking hold and that the central bank can manage the process in a way that prolongs economic growth and keeps unemployment low. level.

“There are several million more job openings than there are unemployed,” Powell said. “I think there is enough room to raise interest rates without threatening the labor market.”

The unemployment rate in the United States fell to 3.9%, down from its peak of 14.7% at the worst economic point of the pandemic and close to its February 2020 level of 3.5%.

Inflation accelerated sharply in 2021 and is expected to remain uncomfortably high for much of the year. Economists predict the Fed’s favorite inflation gauge will show prices rising 5.8% in the year to December when the latest report comes out on Friday, more than double the pace of 2 % the Fed is targeting annually and on average.

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Fed rate hikes will make it more expensive, over time, to borrow for a home, car or business. The Fed’s intention is to temper economic growth and calm inflation, which is at a 40-year high and is eating away at US wage gains and household budgets, without increasing unemployment.

“The best thing we can do to support continued labor market gains,” Powell said, “is to promote a long expansion, and that will require price stability.”

The central bank’s latest policy statement follows wild swings in the stock market as investors are gripped by fear and uncertainty about how quickly and how far the Fed will go to reverse its rate policies lows, which have fueled the economy and the markets for years. .

The broad S&P 500 index fell almost 10% this month before rebounding slightly on Wednesday.

Asked about stock market volatility, Powell pointed out that the Fed’s “ultimate focus” is on “the real economy.” But he added: “We feel the communications we have with market participants and the general public are working. Monetary policy is working significantly through expectations.”

Chairman Joe Biden said last week it was “appropriate” for Powell to adjust Fed policies. And Republicans in Congress endorsed Powell’s plans to raise rates, providing the Fed with rare bipartisan support to tighten credit.

“The risk is accelerating the pace of Fed tightening given the stickiness of inflation,” said Kathy Bostjancic, an economist at consulting firm Oxford Economics. “Chair Powell’s hawkish tone reflected the upside risks to inflation.”

In the statement it issued Wednesday after its last policy meeting, the Fed said it “expects it will soon be appropriate” to raise rates. Although the statement did not specifically mention March, half of Fed policymakers expressed a desire to raise rates by then, including some members who have long favored low rates to support hiring.

The Fed has also set out the principles it will follow once it decides to cut its nearly $9 trillion in bonds, a sum that has more than doubled since the pandemic hit nearly 20 years ago. two years. Some analysts expect the Fed to start doing so as early as July, a move that would help tighten credit.

The central bank is faced with a delicate and even risky balancing act. If the stock market is engulfed in more chaotic declines, economists say, the Fed could decide to delay some of its credit tightening plans. Modest declines in stock prices, however, are unlikely to affect Fed thinking.

Some economists have expressed concern that the Fed is already acting too late to tackle high inflation. Others say they fear the Fed is acting too aggressively. They argue that many rate increases could unnecessarily slow down hiring. From this perspective, high prices primarily reflect tangled supply chains that Fed rate hikes are powerless to remedy.

This week’s Fed meeting is taking place against the backdrop of not only high inflation – consumer prices have jumped 7% in the past year – but also an economy in the grip of a new wave. of covid-19 infections.

Powell acknowledged that he had not anticipated the persistence of high inflation, having long expressed the belief that it would be temporary.

The spike in inflation has spread to areas beyond those hit by supply shortages – to apartment rents, for example – suggesting it could linger even after the goods and coins move more freely.

Information for this article was provided by Jeanna Smialek of The New York Times.

Federal Reserve Board Chairman Jerome Powell listens during his renominations hearing before the Senate Banking, Housing, and Urban Affairs Committee, Tuesday, Jan. 11, 2022, on Capitol Hill in Washington. (Brendan Smialowski/Pool via AP)