Most Federal Reserve Officials agreed last month that the rise inflation And an incredibly tight labor market could ensure a faster-than-expected pace of interest rate hikes this year as policymakers look to combat price hikes.
The minutes of the January 25-26 US central bank meeting show that many policymakers believe that current economic conditions may require faster policy normalization than they did in 2015, although they emphasized that these expectations ultimately depend on financial developments. The Fed kept interest rates very low for years after the 2008 financial crisis, and only raised them once at the end of 2015. Officials subsequently raised interest rates eight more times in a three-year period.
“Compared to conditions in 2015 when the committee last began the process of de-aligning monetary policy, participants saw much stronger expectations of growth in economic activity, significantly higher inflation, and a significantly tighter labor market,” the minutes said. “Consequently, most participants suggested that a faster pace of increases in the target range for the federal funds rate is likely to be warranted than in the post-2015 period, if the economy overall develops in line with the committee’s expectations.”
Although central bank officials have left interest rates unchanged since March 2020, they signaled broad support during their two-day meeting in January to begin raising rates amid growing concern about the rapid increase in consumer prices. The rate increase will be the first since December 2018.
“With inflation above 2% and labor market strength, the Committee expects that it will soon be appropriate to raise the target range for the federal funds rate,” the Fed said in its statement after last month’s meeting.
Although policy makers did not provide an exact timetable for the rate hike, they did hint that it could be done during their March 15-16 meeting. The minutes bolstered that sentiment, with officials indicating that they plan to raise interest rates “soon” and that they will begin reducing the $9 trillion balance sheet shortly thereafter.
“There is nothing really concrete when it comes to the timeline, so there is still a huge question mark,” said Mike Lowengart, managing director of investment strategy at E*Trade. “But the bottom line is that price increases are coming, and they will come soon. Investors should keep in mind that even with some hikes, rates will still be very low by historical standards, so while it may lead to volatility, in the longer term investors should take it Step by Step “.
The Fed already began slowing its bond purchases last year and is on track to end the program in early March, allowing policy makers to start raising interest rates and slashing the $9 trillion balance sheet. It is not clear when the central bank will start reducing its bond holdings, though officials said in the statement that they will start in a “predictable manner” primarily by adjusting the amount they will reinvest as their bond holdings expire.
Several Wall Street banks, including Goldman Sachs and Bank of America, expect the Federal Reserve to raise interest rates seven times this year in order to cool rising inflation. The possibility of seven interest rate hikes this year is also gaining momentum among traders: According to CME’s FedWatch tool, traders are now pricing in more than a 60% chance of a hike at every Federal Reserve meeting this year.
Federal Reserve Chairman Jerome Powell He left open the possibility of a rate hike at every meeting this year and refused to rule out a more aggressive rate increase of half a percentage point, but said it was important to be “modest and smart”. In addition to the March meeting, the Fed holds meetings in May, June, July, September, November and December.
“We will be led by incoming data and shifting expectations,” Powell told reporters during the Federal Reserve’s January meeting.
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