The Federal Reserve signaled Wednesday that it will likely raise interest rates in March as part of a monetary policy shift to temper an over-heating economy and soaring inflation.
“The committee is of a mind to raise the federal funds rate at the March meeting assuming that the conditions are appropriate for doing so,” Federal Reserve chair Jerome Powell said at a press briefing.
With inflation far exceeding the central bank’s 2 percent target, the Fed plans to increase the cost of borrowing to slow down economic activity, which will hopefully moderate the price surges across commodities and commercial sectors. Prices are increasing at the fastest pace in almost four decades, with 7 percent annual inflation in December. A supply-chain crisis marked by prolonged shipping delays and production bottlenecks is still ongoing and exacerbating inflationary pressures.
Powell also said that the Fed will start to unload its massive balance sheet by tapering off its large-scale purchases of bonds and other assets, a program which the Fed has sustained for many years and which has injected enormous monetary stimulus into the economy. The Fed currently maintains a portfolio of over $8 trillion worth of U.S. government bonds and mortgage-backed securities (MBS).
He said that inflation “has not gotten better. It has probably gotten a bit worse. . . . To the extent that situation deteriorates further, our policy will have to reflect that,” Reuters reported. “This is going to be a year in which we move steadily away from the very highly accommodative monetary policy we put in place to deal with the economic effects of the pandemic.”
However, Powell still kept a sense of optimism that the inflation so many consumers are feeling at the gas pump and across a diverse range of products will have an expiration date, possibly in the near term. “Like most forecasters we continue to expect inflation to decline over the course of the year,” Powell said Wednesday.
The stock market tumbled in response to Powell’s monetary tightening announcement. Low-interest policies often have the effect of fueling financial market booms, which is why warnings of rate hikes rarely bode well for them.
Source: National Review
