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Fed Signals March Hike in Play as Battle to Stem Inflation Intensifies

EconomyJan 26, 2022 03:59PM ET
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© Reuters.

By Yasin Ebrahim

Investing.com – The Federal Reserve on Wednesday appeared to lay out the carpet for a March rate hike after saying it may "soon" begin to raise interest rates to bring red-hot inflation under control.

The Federal Reserve kept interest rates unchanged within the 0% to 0.25% range, but signalled that liftoff in rates could begin soon after the end of the monthly purchases expected in March.

"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 Fed said in a statement. 

In December, the Fed said it would double the pace at which it tapers monthly bond purchases to $30 billion each month, with a view to end its quantitative easing program by early March. 

The policy statement was largely in line with market expectations, but in the press conference that followed Fed chairman Jerome Powell adopted a hakwish monetary policy stance, 

Powell said there was "quite a bit of room to raise rates without hurting jobs," stoking expectations that the Fed's plan to tighten monetary policy measures, which have underpinned risk assets, may be more agressive than expected.  

The odds of a March rate hike have risen to about 93%, according to Investing.com’s Fed Rate Monitor Tool.

The latest signalling from the Fed marks a hawkish shift in policy as Powell had previously downplayed how soon rate hikes would follow the end of the tapering.

Stubbornly high inflation has forced the Fed to rethink its monetary policy stance, and part ways with its narrative that price pressures were “transitory.” The Fed has flagged "supply and demand imbalances" as the key driver of elevated levels of inflation.

The improvement in the labor market has also served as another catalyst for the Fed to double up on efforts to combat inflation after the unemployment rate dropped under 4% to pre-pandemic levels.

Wall Street is betting that a potential rate hike in March will be followed up by a further three rates this year, leading to the start of the Fed reducing its balance sheet in the summer.

“We see the Fed delivering its first of four 25bp rate hikes this year at its March meeting, then announcing a more aggressive runoff of its balance sheet in July,” Morgan Stanley said in a note.

Powell was reluctant to go into detail about the Fed's plan to tighten the balance sheet but stressed that rake hikes would be active tool of monetary policy. 

"The federal funds rate is our primary means of adjusting monetary policy, and that reducing our balance sheet will occur after the process of raising interest rates," Powell said in a press conference. The plan to reduce the balance sheet will "occur over time in a predictable manner, primarily through adjustments to reinvestments so that securities roll off our balance sheet," he added.

Some market participants have raised concerns that reducing the balance sheet and rising rates at the same time may prove a difficult pill for the market to swallow. 

“I would personally like to see the Fed hike once and then use the balance sheet versus rate hikes … Doing both at the same time could be pretty difficult for markets,” John Luke Tyner, portfolio manager at Aptus Capital Advisors said in an interview with Investing.com on Tuesday.

Fed Signals March Hike in Play as Battle to Stem Inflation Intensifies
 

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Comments (52)
secure us
secure us Jan 28, 2022 1:25AM ET
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first step in curbing inflation is to bring down Crude, what are we waiting for?
DrFunkenstein hayson
DrFunkenstein hayson Jan 26, 2022 10:17PM ET
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we're going to look back at this time period and say. why did we ever give control of our finances and wealth to stupid faceless bureaucrats, that know nothing. this insanity has to end
Joel Schwartz
Joel Schwartz Jan 26, 2022 7:32PM ET
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Crude is up 20% in a month. The FED have abandoned their inflation mandates. Jeez, just look at their balance sheet if you want to see how serious they are….
jose goncalves
jose goncalves Jan 26, 2022 6:07PM ET
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Thats why the crash is around the corner!
Chad RicherThanYou
Chad RicherThanYou Jan 26, 2022 5:55PM ET
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Enjoy your bidenflation folks
Ricardo Diogo
Rcd72 Jan 26, 2022 5:55PM ET
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no it is just silly Ponzi absurd liquidity wasted in to speculation by the fed itself!
Jurgen Daub
Jurgen Daub Jan 26, 2022 5:55PM ET
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delayed trumpflation sounds better
marlow seay
marlow seay Jan 26, 2022 5:55PM ET
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biden and trump
marlow seay
marlow seay Jan 26, 2022 5:55PM ET
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but it's not on the presidents
Chad RicherThanYou
Chad RicherThanYou Jan 26, 2022 5:54PM ET
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We all need to March on the fed with pitch forks and A R Fifteens
Sattar Langary
Sattar Langary Jan 26, 2022 5:53PM ET
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I think people now know that a bad republican is better than a good democrat.
Sattar Langary
Sattar Langary Jan 26, 2022 5:53PM ET
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*president
hd tv
hd tv Jan 26, 2022 5:53PM ET
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Wasn't it a republican that put jp in charge of the fed?
William Bailey
William Bailey Jan 26, 2022 4:57PM ET
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Whales are slinking away … retail better slide out before they do
Bill Riley
Bill Riley Jan 26, 2022 4:54PM ET
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Doti first joked about being kind of like Usain Bolt in winning the October 10 Chicago Marathon—for the 75 to 79 age group.Then he noted that Chapman’s forecast from a year ago was once again the most accurate in the nation, with a spot-on prediction of 5.7 percent real gross domestic product (GDP) growth for 2021. An average of other forecasts came in at just 4.2 percent. Two other such forecasts came from Wells Fargo at 4.8 percent and UCLA at 3.6 percent.
Bill Riley
Bill Riley Jan 26, 2022 4:49PM ET
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JEFFREY GUNDLACH: I think the bond market is already showing enough of a recession indicator that by 2023 it seems pretty likely. And like I said earlier, I don't think a lot of Fed officials and economists and investors appreciate the fact the economy keeps buckling at lower and lower interest rates. So I think the Fed only has to raise rates four times and you're going to start seeing really a plethora of recessionary signals.
William Bailey
William Bailey Jan 26, 2022 4:49PM ET
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Fed has lost all power and credibilty
 
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