(Bloomberg) — Federal Reserve Chairman Jerome Powell said the central bank was ready to raise interest rates in March and did not rule out action at every meeting to tackle the highest inflation in a generation.
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“The committee is considering raising the federal funds rate at the March meeting” if there are conditions to do so, Powell said in a virtual news conference on Wednesday, while noting that officials have not made any decisions on the course of policy because it should be “smart.”
He was speaking after the Federal Open Market Committee concluded its two-day meeting with a statement declaring that “soon it will be appropriate to raise the target range for the federal funds rate,” citing inflation well above its 2% target and a strong functioning market.
In a separate statement, the Fed said it expects the process of reducing the balance sheet to begin after it began raising interest rates. Powell said that no decision was made at that meeting about the pace of the run-off or when it would start.
The tough pivot, on the back of turmoil in stocks, comes amid repeatedly surprising consumer inflation readings of 7% – the highest since the 1980s – and a tight labor market that has driven unemployment down faster than expected to nearly the outbreak of the pandemic. level.
The yield on the 10-year Treasury rose sharply as Powell spoke while stocks fell and the dollar rose.
“The tone of Powell’s press conference is tough,” said Neil Dutta, head of economic research at Renaissance Macro Research. “The Fed would be more willing to rise faster in the face of upward inflation surprises rather than easily in the face of negative employment surprises.”
The rate hike would be the central bank’s first since 2018, with many analysts expecting a quarter-point increase in March followed by three more this year and additional moves after that. Critics say the Fed has been too slow to act and is now behind the curve in tackling inflation, although key market metrics do not support this view. Some Fed officials have even publicly discussed whether they should raise interest rates more this year than expected.
“We’re going to need to be smart enough to be able to respond to the full range of plausible outcomes,” Powell said. “We will remain alert to risks, including the risks of continued higher-than-expected inflation, and be prepared to respond as appropriate.”
The vote was unanimous. Philadelphia Fed President Patrick Harker voted to replace the Boston Fed, which currently has no president, while three vacancies on the Board of Governors reduced the number of voters at that meeting to nine.
Officials kept their benchmark interest rate target range unchanged at zero to 0.25%, as expected.
They also said they would finish buying the assets on schedule, leaving them on track to finish in “early March”.
The Federal Reserve’s balance sheet is nearly $8.9 trillion, more than twice the size before officials began buying massive assets at the start of the pandemic to quell market panic.
In a separate statement outlining the principles it will apply to reduce its balance sheet, the Fed said that in the long-term it intends to hold primarily Treasuries.
The Fed also currently holds mortgage-backed securities and the shift is intended to reduce its impact “on the allocation of credit across sectors of the economy,” she said.
Despite criticism that it has slowed, the Fed is moving much faster than it previously expected – spurred on by the failure of inflation to abate as expected amid strong demand, faltering supply chains and tightening labor markets. More recently, in September, central bank officials split over whether a rate hike in 2022 was warranted.
This meeting is Powell’s last term as Fed chair and ends in early February. He was nominated for another four years in office by President Joe Biden and is expected to be confirmed by the Senate with bipartisan support.
In his second term, Powell, 68, will need to convince investors and the American public that the FOMC can succeed in returning inflation to the Fed’s 2% target while boosting job gains while the job market recovers from the pandemic.
Biden last week backed Fed plans to scale back monetary stimulus and said the central bank’s job was to rein in inflation, which has become a political headache for Democrats ahead of November’s midterm elections when they could lose their slim majority in Congress.
(Updates with the analyst’s reaction in the seventh paragraph.)
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