Fed flags rate hike ‘soon’, plans to shrink balance sheet ‘significantly’

The combined moves will shift the US central bank’s pivot away from the lax monetary policy that has defined the pandemic era and toward a more urgent fight against inflation.

“With inflation above 2 percent and a strong labor market, the committee expects it to soon raise the target range for the federal funds rate,” the Fed’s rate-setting Federal Open Market Committee said in a unanimous statement after the end. would be suitable for.” in a two-day policy meeting

FOMC members also agreed on a set of principles to “substantially reduce” the size of the Fed’s vast asset holdings, by limiting how much it would reinvest the principal from bonds maturing each month. The plan will kick in after a liftoff in interest rates, the Fed said without yet setting a specific date, pace or final size.

Over time the Fed’s roughly $9 trillion balance sheet will not only be reduced, but will be shifted away from mortgage-backed securities and weighted toward the U.S. Treasury, “causing the Federal Reserve on the allocation of credit to sectors of the economy.” The impact of reserve holdings will be mitigated,” the central bank said.

The Fed’s statement, moving forward with plans to tighten monetary policy, cited “concrete” recent job gains, which continued even as the outbreak of the Omicron version of the coronavirus pushed up the number of daily cases. pushed to record levels. While the Fed has stopped trying to assess when inflation might ease, the statement said officials expect the pace of price increases to slow as improvements in global supply chains.

Other risks have arisen in the weeks following the Fed’s December 14-15 policy meeting, with Western nations fearing a possible Russian invasion of Ukraine and stock selling by investors.

This was not mentioned in the policy statement, nor was it different from the Fed’s decision against inflation reaching a decade-high.

“The supply and demand imbalances related to the pandemic and the economy’s reopening continue to contribute to higher levels of inflation,” the Fed said, with consumer prices rising at a 7% annual rate, the highest since the 1980s. Level.

US stocks, upbeat to start the year on concerns about how quickly the Fed could move to control inflation, added to the day’s gains following the statement’s release. The S&P 500 index was up more than 2%, while the Nasdaq Composite, which hit hard in January’s selloff, was up 3.3%.

Yields on longer-term Treasury securities rose higher and the dollar edged up marginally against a basket of currencies from major trading partners.

Policymakers did not release new economic and interest rate projections on Wednesday. In a news conference scheduled for 2:30 a.m. EST (1930 GMT), Fed Chair Jerome Powell is expected to bring the central bank in line with public and market expectations that it will move more aggressively against inflation.