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Fed plans to raise rates as early as March to calm inflation

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Fed plans to raise rates as early as March to calm inflation

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WASHINGTON — The Federal Reserve said Wednesday it plans to start raising its benchmark interest rate as early as March, a key step in reversing its pandemic-era low rate policies that fueled hiring. and growth, but also drives up inflation.

With high inflation weighing on consumers and businesses and steadily falling unemployment, the Fed also said it would phase out its monthly bond purchases, which were aimed at lowering longer-term rates, in March. .

Central bank actions are sure to make a wide range of borrowing — from mortgages and credit cards to car loans and business credit — more expensive over time. These higher borrowing costs, in turn, could slow consumer spending and hiring. The most serious risk is that the Fed’s abandonment of low rates could trigger a new recession.

In a statement released after its last policy meeting, the Fed “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.

By raising rates, the Fed is betting that it can slow inflation without weakening the economy too much. Speaking at a press conference, President Jerome Powell suggested, as he has done before, that controlling inflation is in itself vital for a strong labor market.

“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.”

“I think there is good leeway,” he added, “to raise interest rates without threatening the labor market. It is in many ways a job market. historically tense work.”

On Wednesday, the Fed also laid 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 a while ago. almost 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’s latest policy statement follows wild swings in the stock market as investors have been gripped by fear and uncertainty about how fast and how far the Fed will go to reverse its policies. low rates, 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.

High inflation has also emerged as a serious political threat to President Joe Biden and congressional Democrats, with Republicans pointing to rising prices as one of their main lines of attack as they eye the November election.

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

The Fed’s bond purchases were aimed at reducing long-term interest rates to stimulate borrowing and spending. Many investors also viewed bond buying as helping to fuel stock market gains by injecting liquidity into the financial system.

Earlier this month, the minutes of the Fed’s December meeting revealed that the central bank was considering reducing its bond holdings by not replacing maturing bonds – a more aggressive step than simply ending to his purchases. The impact of the reduction in the Fed’s bond stock is not well known. But the last time the Fed raised rates and cut its balance sheet simultaneously was in 2018. The S&P 500 stock index fell 20% in three months.

By not replacing some of its bond holdings, the Fed is actually reducing demand for Treasuries. This increases their returns and makes borrowing more expensive

Some analysts said they don’t know how big the impact on interest rates will be or how much the Fed will rely on shrinking its balance sheet to affect interest rates.

All of this means that Powell’s Fed faces a tricky 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. However, modest declines in stock prices 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 hikes 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, the fastest pace in nearly four decades – but also of an economy plagued by 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.

Fed plans to raise rates as early as March to calm inflation

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