The Federal Reserve signaled Wednesday that it plans to begin raising its benchmark interest rate as soon as March, a key step in reversing its pandemic-era low-rate policies that have fueled hiring and growth but also escalated inflation. With high inflation squeezing consumers and businesses and unemployment falling steadily, the Fed also said it would phase out its monthly bond purchases, which have been intended to lower longer-term rates, in March. In a statement issued after its latest policy meeting, the Fed said it "expects it will soon be appropriate” to raise rates. CNBC reports the expected quarter-percentage point increase would be the first increase since December 2018.
The AP reports that though the statement didn't specifically mention March, half the Fed's policymakers have expressed a willingness to raise rates by then, including some members who have long favored low rates to support hiring. The Fed on Wednesday also set out principles it will follow once it decides to reduce its nearly $9 trillion in bond holdings, a sum that has more than doubled since the pandemic struck nearly two years ago. Some analysts expect the Fed to begin doing so as soon as July, a move that would contribute to tighter credit.
CNBC reports the Dow jumped 260 points, or 0.8%, on the news, though by 3:30pm ET it had reversed course and was down roughly 300 points. Still, the Wall Street Journal observes that "Fed officials face a tricky task of responding to high inflation with two different policy instruments, which could provide more ammunition to slow the economy, but which have in the past caused confusion with markets." Indeed, the AP reports the last time that the Fed raised rates and reduced its balance sheet simultaneously was in 2018. The S&P 500 stock index fell 20% in three months.
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