Inflation-fighting Fed set to signal interest rate hike in March

Federal Reserve Chairman Jerome Powell delivers remarks on a screen as a trader works on the floor of the New York Stock Exchange (NYSE) in Manhattan, New York, U.S., December 15, 2021. REUTERS /Andrew Kelly/File Photo

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  • U.S. Central Bank account statement as of 2:00 p.m. EST (19:00 GMT)
  • Fed’s Powell will hold a press conference
  • Volatile financial markets before the political decision

WASHINGTON, Jan 26 (Reuters) – The Federal Reserve is expected to signal on Wednesday its intention to raise interest rates in March as it focuses on tackling inflation and shelving, at least for now, economic risks posed by the ongoing coronavirus pandemic, a bout of market volatility and Western fears of a Russian invasion of Ukraine.

The policy decision, due for release at 2 p.m. EST (1900 GMT) after a two-day meeting, will not commit the U.S. central bank to any particular course of action when its rate-setting committee meets again in seven weeks. , and for now, the benchmark overnight interest rate will remain unchanged at a level close to zero.

But barring a sharp shock to the economy, that will likely change in March when the Fed is expected to approve the first of what could be several quarter-percentage-point interest rate hikes this year.

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This week’s meeting, analysts say, can be used to telegraph what’s happening on both rates and a possible decision to reduce the Fed’s massive holdings of government bonds as a second lever to raise the cost of the business and household credit and, in theory, slow the pace of price increases.

With U.S. inflation “very high” and unemployment at just 3.9%, Fed Chairman Jerome Powell and his colleagues will “talk about the economy without sounding apocalyptic about inflation and set the stage for a takeoff in interest rates in March,” said the Cornerstone Macro economist. Roberto Perli wrote in a note ahead of the decision. They are likely to continue debating how and when to reduce massive central bank holdings Treasury bills and mortgage-backed securities as an additional way to tighten monetary policy, but without announcing a decision today.

Powell is due to start a press conference half an hour after the statement is released. Fed officials won’t provide updated economic and interest rate projections on Wednesday, so it will be up to Powell to clarify how the central bank’s views align with investors who expect a more vigorous fight against inflation and sold US equities and began raising long-term interest rates this month.

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Trading on Wall Street this week has been particularly volatile, with intraday swings in the S&P 500 Index (.SPX) as high as 4%. The index is down about 8% since the start of the year.

Markets were calmer on Wednesday ahead of the Fed’s policy release, with major U.S. stock indexes surging and U.S. government bond yields falling in early trading.

But the turmoil, and in particular the rise in market interest rates for things like home mortgages, has served as a reminder of the dividing line that the Fed and Powell are walking as they try to bring about a drop in inflation that also maintains the ongoing economic recovery.

At his press conference, Powell “won’t seem nervous about inflation staying elevated for a long time,” Perli wrote, but he’ll still leave open the possibility of raising rates faster than expected, or even more than the usual quarter of a percentage point. increase, “as an insurance against the extreme risks of inflation, which are obviously substantial”.

These risks have become increasingly pronounced over the past five months. Powell in August used a high-profile speech to explain why he thought high inflation would be “transient,” but since then economic data showed otherwise.

With consumer inflation rising 7% annually, the fastest pace since the early 1980s, the issue has been flagged by the White House as a key economic risk and, for President Joe Biden’s Democratic Party, political risk.

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New data released later this week will likely show that the resurgence of the pandemic has both reduced the pace of economic growth at the end of 2021 and kept inflation measures watched more closely by the Fed well above of its 2% target.

There is little respite in sight. On the contrary, international developments carry a risk of worse to come. China’s strict coronavirus lockdown policies mean global supply chains could be slower to return to normal, and a military conflict between Russia and Ukraine could also contribute to inflation.

“The consequences for the energy market … would likely be a further increase in oil and natural gas prices, and therefore energy costs more broadly for many countries around the world,” Gita Gopinath, the first director deputy general of the International Monetary Fund, said Tuesday after the IMF lowered its economic growth forecast for 2022 for the US, Chinese and global economies. Read more

“So in terms of headline inflation numbers, that could definitely keep headline inflation much higher for longer,” she said.

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Reporting by Howard Schneider Editing by Paul Simao

Our standards: The Thomson Reuters Trust Principles.

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