Fed signals interest rate hike could come 'soon' as inflation rages

The Fed is ‘responsible’ for volatile markets in 2022

Penn Mutual Asset Management CIO Mark Heppenstall argues there’s ‘a lot of pressure’ on Federal Reserve Chairman Jerome Powell ahead of his press conference.

The Federal Reserve on Wednesday signaled it could "soon" raise interest rates for the first time in three years, paving the way for a March liftoff as policymakers seek to keep prices under control and combat the hottest inflation in nearly four decades.

Although central bank officials left rates unchanged – where they have sat unchanged since March 2020 – during their two-day, policy-setting meeting this week, they indicated broad support to begin aggressively normalizing policy, including raising rates, amid growing concern over the rapid increase in consumer prices. The rate increase would mark the first since December 2018. 

"With inflation well above 2 percent and a strong labor market, the committee expects it will soon be appropriate to raise the target range for the federal funds rate," the Fed said in its post-meeting statement. The central bank's next meeting is slated to take place on March 15-16.

The Fed already began slowing its bond purchases last year and is still on track to conclude the program in early March, allowing Fed officials to begin hiking interest rates and reducing the $8.8 trillion balance sheet. It is unclear when the Fed will begin shrinking its bond holdings, although officials said in the statement that it would start "in a predictable manner" primarily by adjusting how much it will reinvest as its bond holdings expire. 

Prices surged 7% in December, the Labor Department said earlier this month, marking the fastest pace for inflation since 1982 as consumer demand confronts a shortage of goods caused by congested ports and other pandemic-induced disruptions in the supply chain.

FED STATEMENT, INFLATION UPDATE AND POWELL PRESSER: LIVE UPDATES

Most economists expect the Fed to raise rates four times this year. Traders are already pricing in a more than 90 % chance of a rate increase during the Fed's mid-March meeting, and a roughly 65% chance of four hikes over the course of the year, according to the CME Group, which tracks trading. 

Some economists believe the Fed waited too long to confront the burst in inflation, while others have expressed concerns that moving too quickly to stabilize prices risks slowing hiring and potentially leaving many workers, particularly lower-income Americans, without a job. Hiking interest rates tends to create higher rates on consumers and business loans, which slows the economy by forcing employers to cut back on spending. 

The Fed meeting will also take place in the shadow of an extremely volatile week for the stock market, with the Dow Jones Industrial Average on Monday plunging more than 1,000 points to its lowest level in 10 months before clawing its way back. 

This is a developing story. Please check back for updates.

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