The Federal Reserve signaled an increase in interest rates in March. At its last meeting, the Federal Reserve was clear: interest rate hikes will start earlier than originally estimated, and at least three such decisions will be made during the year. However, as the days go by and inflation shows its teeth hard, with a record of many decades, policymakers place interest rate hikes even earlier, starting in March.
With markets shaking and inflation galloping, the Federal Reserve announced on Wednesday that it could soon raise interest rates for the first time in more than three years. Here, too, it is worth noting that the US Federal Reserve does not meet in February.
In a surprise decision, the Fed’s open market commission said it was likely to come up by a quarter of a percentage point in its key short-term lending rate for the first time since December 2018.
The statement comes in response to inflation, which is at its highest level in nearly 40 years. Although the Fed has announced its decision on a less accommodative policy, markets in recent days have been extremely volatile as investors worried that the Fed could tighten the policy even more than expected.
The announcement
As it states in its announcement after its two-day meeting, the economic activity and employment indices continued to strengthen.
“The areas most affected by the pandemic have improved in recent months, but are affected by the recent sharp rise in COVID-19 cases. Job gains have been steady in recent months and the unemployment rate has fallen sharply. The supply and demand imbalances associated with the pandemic and the opening up of the economy continued to contribute to higher levels of inflation. “Overall financial conditions remain accommodative, partly reflecting policy measures to support the economy and the flow of credit to US households and businesses.”
The Fed says the course of the economy continues to depend on the course of the virus: Progress on vaccinations and easing restrictions are expected to support economic activity and employment as well as reduce inflation. Risks to the economic outlook remain, including new variants of the virus.
The Commission is aiming for maximum employment and inflation at 2 percent in the long run.
“In support of these targets, the Commission has decided to keep the interest rate target range at 0 to 1/4 percent. With inflation well above 2 percent and a strong labor market, the Commission expects that it will soon be appropriate to increase the target range for the federal funds rate. The Commission decided to continue reducing the monthly rate of its net asset purchases, ending it in early March. “From February, the Commission will increase its holdings of government securities by at least $ 20 billion a month and securities backed by mortgages by at least $ 10 billion a month.”
The initial reaction in the markets is positive
The announcement of the Federal Reserve initially had a positive impact on the markets with the key indicators expanding their initial profits.
The Dow Jones industrial average was up about 500 points, or 1.4%. The S&P 500 gained 2.2% and the Nasdaq Composite gained 3.3%.
The yield of the benchmark index of the 10-year bond increased to 1.7995%.
Fall then
Despite the positive initial reaction, the speech of the Fed President Jerome Powell, immediately afterwards triggered liquidations with the result that the main indicators turned negative ground.
The Dow traded more than 200 points lower, or 0.6%. The S&P 500, which had risen up 2.2%, fell 0.6%. The Nasdaq Composite fell 0.6%, recording a gain of 3.4%.
At the close, the Dow Jones industrial average was down 0.38% at 34,168 points, the S&P 500 was down 0.15% at 4,349 points and the Nasdaq Composite was up 0.02% at 13,542 points.
New jump in inflation
We remind you that just the previous week the new data showed a new jump in inflation with the CPI index “catching” 7%, at its highest point in forty years!
However, both Fed executives have avoided taking a position on the “hot” question of the day, namely how much interest rate hikes the market should expect during the year.
“The timing of these decisions will be based on the careful study of a wide range of data and information, based on the goals of full employment and price stability,” Mr Williams said, keeping his intentions closed. Although he argued that the economy is in very good shape to withstand the monetary policy adjustment.
