By Howard Schneider and Ann Saphir
WASHINGTON (Reuters) – The U.S. central bank (Fed) said on Wednesday it was likely to raise interest rates across the country in March and reaffirmed plans to end its bond purchases that month, also as Fed Chair said. Jerome Powell has promised that it will be a determined fight to tame inflation.
“The committee intends to raise the federal funds rate at its March meeting, assuming conditions are right for doing so,” Powell said, going further than the message in the Fed’s monetary policy statement that only rates would rise “soon”.
Subsequent interest rate hikes and an eventual reduction in asset holdings by the Fed would follow as needed, Powell said, as policymakers monitor how quickly inflation moves away from multi-decade highs that it now finds itself back on target. 2% from the Fed.
Much remains to be decided, the Fed chief said, including how quickly rates will rise or how quickly policymakers will let the $9 trillion balance sheet fall.
But the Fed leader was explicit on one key point: With inflation high and, for now, apparently getting worse, the Fed this year plans to gradually clamp down on credit and end the extraordinary support it provided to the U.S. economy during the pandemic.
Since the last Fed meeting in December, Powell said, inflation “has not improved. It’s probably gotten a little worse… As the situation deteriorates further, our (monetary) policy will have to reflect that,” Powell said. “This will be a year where we gradually move away from the highly accommodative monetary policy we have implemented to deal with the economic effects of the pandemic.”
The extent of the Fed’s move away from policies adopted during the pandemic towards a more combative approach to inflation will take more shape in the coming weeks.
It will depend on how inflation itself behaves, and Powell said officials still expect much of the improvement to come as the aftershocks from the pandemic subside, perhaps allowing them to do less work through tighter monetary policy.
A myriad of risks remain, from a pandemic that is still ongoing to a potential Russia-Ukraine military conflict.
But Powell said monetary policymakers right now feel they have “plenty of room to raise interest rates” without threatening employment progress or delaying an economic recovery they want to keep going.
In a refrain that has become commonplace, he noted that “the economy is quite different” today than it was when the Fed last started raising interest rates in 2015, with higher inflation, lower unemployment, which Powell considers enough momentum for the economy to go without central bank support.
In that turn to tighter monetary policy, the Fed initially moved glacially, with a 0.25 percentage point hike in interest rates in 2015 and just another one in 2016.
Investors are expecting a lot more this time around, with interest-rate futures prices building in four interest rate hikes this year.
Fomc members also agreed at this week’s meeting on a set of principles to “significantly reduce” the size of the Fed’s massive asset holdings.
Officials said they would shrink holdings “primarily” by limiting how much of the principal of the maturing bonds will be reinvested each month. That plan would begin after interest rates rise, the Fed said, without yet setting a specific final date, pace or size.
Over time, the Fed’s balance sheet would not only be reduced, it would also shift away from mortgage-backed securities and become weighted against U.S. Treasuries, “thus minimizing the effect of Federal Reserve holdings on credit allocation.” between sectors of the economy”, said bank.
IMPROVEMENTS IN THE SUPPLY CHAIN
The Fed’s monetary policy statement cited recent “solid” job gains that continued even as the outbreak of the Omicron variant of the coronavirus drove daily Covid-19 case numbers to record levels.
While the Fed stopped trying to gauge when inflation might ease, the statement said policymakers continue to expect improvements in global supply chains to ease the pace of price increases.
“Supply and demand imbalances related to the pandemic and the reopening of the economy continued to contribute to high levels of inflation,” the Fed said.
US consumer prices rose 7% year-on-year in December, the highest since the 1980s.
Monetary policymakers did not release new economic and interest rate forecasts on Wednesday.
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