Fed expected to signal interest rate hikes to start in March

The central bank is also set to approve a final round of asset purchases and resume discussions on how and when to reverse the pandemic-driven expansion of its $9 trillion securities portfolio later this year.

The Fed will issue its policy statement at 2 p.m. ET. Most of the attention is likely to be focused on Chairman Jerome Powell’s news conference at 2:30 p.m. Here’s what to watch:

Move ahead

The Fed slashed interest rates to near zero in March 2020, when the coronavirus pandemic hit global commerce. In September 2020, Fed officials said they would keep rates there until inflation is forecast to exceed 2% and the labor market returns to levels consistent with maximum employment.

The Fed may use its postmeeting statement on Wednesday to declare that it has essentially met both goals. Using the Fed’s preferred gauge, inflation rose last year to 4.7% in November from a year earlier, easily exceeding the first objective, excluding volatile food and energy categories. Most Fed officials have suggested that the sharp drop in unemployment in the second half of last year, to 3.9% in December, coupled with strong wage growth has nearly hit the second target.

Such an approval would allow the Fed to provide its clear indication, yet again, that it is prepared to raise interest rates by a quarter percent at its meeting on March 15-16.

pressure points

Mr. Powell is likely to put pressure on his inflation outlook, which could shape how often the Fed raises rates. He provided his latest thinking in testimony on Capitol Hill this month, where he said inflation is high because supply and demand are lax.

The Fed can’t solve shipping or supply-chain bottlenecks, but higher interest rates can eventually cool demand by slowing hiring and earnings growth. Officials are expecting inflation to decline as supply problems ease and demand shifts from goods, where prices rose sharply last year, to services, where inflation has been less extreme.

Central bank officials last month raised interest rates by three quarter-percentage-point interest rates this year and three more next year. They based growth projections on a forecast that sees inflation falling below 3% by December and to a little over 2% by the end of the following year.

Still, many officials have insisted that there is great uncertainty surrounding that forecast, and investors are hungry for how the Fed will react if inflation is expected to remain above 3% later this year.

rate guidance

Given the uncertainty, executives will also debate whether to offer any meaningful forward guidance they can use to describe their intentions for interest rates over the next few years. Forward guidance has been an important part of the Fed’s monetary-policy arsenal for much of the past two decades, a period in which inflation and interest rates have been generally low.

The Fed previously relied on such conditional promises—often wrapped in adjectives—that took on significance in the early 2000s. Before introducing rate hikes in 2004, the Fed stated that such increases were likely to proceed at a “measured” pace. In 2015, the Fed prepared the market for a modest increase in rates by telegraphing such an increase would be “only gradual”.

Today’s economic environment – ​​with much uncertainty about how the labor market, wages and inflation will unfold – may limit the types of clues or assurances the Fed can provide.

In addition, Mr. Powell may face questions over the prospect of raising rates in successive meetings, which are held roughly every six weeks – something the central bank hasn’t done since 2006 – or over the larger, half-way mark. To increase the point rate. The Fed hasn’t done this since 2000.

property purchase

After the Fed cut rates to nearly zero two years ago, it began buying Treasury and mortgage-backed securities to provide additional incentives. Executives began to reduce those purchases last November, and bond purchases accelerated in December. They are likely to approve a final tranche of purchases at their meeting this week, while indicating that it will end the expansion of the Fed’s holdings by March.

property deduction

Officials are expected to receive briefings from Fed employees on proposals to reduce their nearly $9 trillion bond portfolio. Mr. Powell and his colleagues have suggested that the process is likely to begin sooner than after the Fed stopped buying bonds in 2014. He also indicated the process of shrinking those holdings — by allowing securities to mature without reinvesting their earnings. The new ones are likely to move faster than the Fed last reduced its holdings in 2017.

It’s possible that officials could issue higher-level principles to guide investors about how the Fed will manage its asset portfolio after holdings rise in March, but officials are unlikely to release further details on how. How will the shortage progress? Mr. Powell has said it could take two or three meetings to consolidate such plans, suggesting that the process is unlikely to begin before the middle of the year.

Several Fed officials, including Mr. Powell, have indicated they want an adjustment to the Fed’s short-term benchmark interest rate, the federal-funds rate, which is the primary way central banks respond to changes in economic outlook. This means that they may again prefer a way to open up their asset holdings which, once increased to some extent, runs on a premapped schedule.

This story has been published without modification to the text from a wire agency feed