Federal Reserve Chairman Jerome Powell on Wednesday said the central bank “is of a mind” to raise interest rates in March as part of an effort to combat the highest inflation in decades.
“I would say the committee is of a mind to raise the federal funds rate at the March meeting assuming that conditions are appropriate for doing so,” Powell said in a press conference after the Fed’s two-day strategy meeting,
With consumer inflation now running at a 7% annual rate, the Fed wants to get going and move away from its easy-money stance. Wall Street widely anticipates the first increase will take place in March.
Yet Powell was less certain when the Fed will begin to reduce the balance sheet. “We are going to be led by the incoming data and evolving outlook,” he said.
He added that the reduction could start “later this year” and that it would take place “sooner and faster” than it has in the past.
To battle the pandemic, the Fed has kept its benchmark short-term interest rate at zero and bought trillion of dollars of securities to support the economy and financial markets since early 2020.
The asset purchases will continue for a few more months and end in March.
In a separate statement, the Fed issued broad guidelines for how it will shrink its nearly $9 trillion balance sheet. The bank plans to adjust principal reinvestments and eventually jettison most of its holdings in mortgage-backed securities.
Powell stressed that the labor market is “very, very strong,” and “historically tight,” pointing to solid job gains and a sharp drop in the unemployment rate.
Fed officials continue to believe inflation will slow and reverse later in the year. They blame supply and demand imbalances related to the pandemic and the reopening of the economy for the elevated levels on inflation.
Still, Powell acknowledged that inflation has risen faster than the Fed expected. He vowed the central bank would do what is necessary to rein prices back in.
“We will use our tools … to prevent higher inflation from becoming entrenched,” Powell said.
Since the turn of the year, Fed officials have been saying the economy was strong enough so they could move away from their ultra-easy policy.
Robert Brusca, chief economist at FAO Economics, said the fact that the Fed is moving “means a lot” and may cool the economy down.
The Fed’s dot plot shows its policy rate only rising to 2.1% by the end of 2024. Many former Fed officials think the central bank will need to raise rates to closer to 4% to cool inflation
Markets expect four rate hikes from the Fed this year. Economists think the Fed will start to shrink its balance sheet in the summer or early fall.
Investors have been anxious about the impact on the economy of tighter Fed policy and this has led to volatility in the stock market. The Dow Jones Industrial Average DJIA, -0.74% surged by 300 points before the Fed meeting, but stocks turned negative soon after the Fed decision.
Many market commentators think the Fed won’t raise rates much higher than 2% as in the last cycle in 2015-2019.
Brian Bethune, professor of practice at Boston College, thinks there has already been tightening as the 10-year Treasury note yield has risen over the past year.