Federal Reserve hints at raising interest rates in March

• Fed Chair Jerome Powell also hinted that the asset purchases would stop shortly after the interest rate hike

• Markets witnessed volatility after the press conference and the major indices closed significantly lower

The Federal Reserve released a statement on Wednesday stating that it would start shrinking the balance sheet after raising interest rates. The central bank outlined its principles for “significantly” reducing the size of its balance sheet.

“With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate,” the statement said. The statement did not specify a date to initiate the rise in interest rates, though indicators point towards March.

In addition, the committee noted the central bank’s monthly bond-buying will proceed at just $30 billion in February, indicating that the program is expected to end in March. The Fed does not meet in February.

Also Read: IMF chief says Fed’s interest rate hikes could affect weaker economies

The central bank did not specify in its main statement when it would start the process of reducing its bond holdings which have caused its balance sheet to swell to nearly $9 trillion.

Powell to the press

In the press conference held after the Fed’s meeting, Fed Chair Jerome Powell said that the omicron variant will hurt economic growth in the current quarter, but is also expected to drop off rapidly. He added that if the latest wave of COVID-19 passes quickly, then the economic impact should dissipate too.

During the conference, Powell hinted that the first rate hike could come in March, despite the impact of Omicron, and global risks.

Also Read: IMF chief warns of global economic unrest as central banks raise rates to combat inflation

He said, “I would say the committee is of a mind to raise the Federal funds rate at the March meeting, assuming that conditions are appropriate for doing so.”

On being questioned whether the Federal Open Market Committee (FOMC) could raise interest rates by 50 basis points, rather than 25 basis points, Powell said he couldn’t say what the precise path would be, and that such decisions haven’t been taken.

Painting the Street red

Meanwhile, stocks fell into the red on Wall Street, after Fed Chair Powell suggested there is ‘quite a bit of room’ to raise interest rates without threatening the labor market.

The stock market wobbled for a bit experiencing volatility after the Fed Chair closed with an aggressive stance.

The Dow Jones Industrial Average closed 0.4% lower at 31,168 points, down almost 130 points today. The broader S&P 600 index lost 6.5 points, dropping by 0.15%, to end at 4,349.93.

The tech-heavy Nasdaq Composite ended flat, having already fallen by over 13% so far this year.

Also Read: Fed to wind-down bond purchases, signals three rate hikes in 2022

Picture Credits: Reuters