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Fed Signals Rate Hike In March; Plans Significant Balance Sheet Reduction
In its December's monetary policy meeting, the Fed had made it clear to investors that rates would soon be going up. The move comes amid high inflation numbers in the United States, with consumer prices surging to 7 per cent in the past year, the fastest in nearly four decades
Photo Credit : REUTERS/Andrew Kelly/File Photo
The Federal Reserve on Wednesday signalled that it plans to raise U.S. interest rates in March. It also reiterated its plans to end its bond purchases by then. These steps will significantly impact and reverse its pandemic-era low-rate policies that fueled hiring and growth. However, the policies also saw an escalation in inflation figures, with consumer prices surging to 7 per cent in the past year, the fastest in nearly four decades.
Fed Chair Jerome Powell, speaking in a news conference after the end of a two-day policy meeting, said the U.S. central bank will be open-minded as it adjusts monetary policy to keep persistently high inflation from becoming entrenched.
In moving ahead with a plan to tighten monetary policy, the Fed's statement cited "solid" recent job gains that continued even as the outbreak of the Omicron variant of the coronavirus pushed daily case numbers to record levels. While the Fed has stopped trying to assess when inflation might ease, the statement said officials continue to expect improvements in global supply chains will reduce the pace of price increases.
Borrowings To Become Costlier
The latest move by the Federal Reserve is sure to make borrowings costlier over time which, in the long run, may slow consumer spending and hiring. The gravest risk is that the Fed’s abandonment of low rates could trigger another recession.
Much of Fed’s 2021 was spent playing down any immediate need for tighter money. However, in its December’s monetary policy meeting, it asserted a hawkish stance wherein the minutes of the meeting, which were published on January 5, it made clear to investors that rates would soon be going up.
Powell has acknowledged that he failed to foresee the persistence of high inflation, having long expressed the belief that it would prove temporary. The inflation spike has broadened to areas beyond those affected by supply shortages — to apartment rents, for example — which suggests it could endure even after goods and parts flow more freely.
The Federal Open Market Committee (FOMC) members also agreed on a set of principles for "significantly reducing" the size of the Fed's massive asset holdings. Officials said they will shrink holdings "primarily" by limiting how much of the principal from maturing bonds it would reinvest each month. The Fed said that that plan would start after the liftoff in interest rates, without yet setting a specific date, pace, or final size.
The Fed's latest policy statement follows dizzying gyrations in the stock market as investors have been gripped by fear and uncertainty over just how fast and far the Fed will go to reverse its low-rate policies, which have nurtured the economy and the markets for years. The broad S&P 500 index fell nearly 10% this month before rebounding slightly on Wednesday.
In the domestic market, the combination of the anticipated outcome of the Fed’s meeting and the geopolitical tension between Ukraine and Russia led to Sensex falling by nearly 4,000 points in the last six days. However, on Tuesday, the benchmark indices bounced back, with the Sensex adding 366.64 points to close at 57.858.15 and the Nifty adding 128.85 points to close at 17,277.95. Thursday’s trading session will see the market reacting to the Fed’s move.
(With Inputs from AP, Reuters)