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The Federal Reserve signaled plans Wednesday to raise its benchmark interest rate in mid-March as it attempts to cool an overheating US economy where inflation is stuck at 40-year highs.
The Fed teed up a quarter-percentage-point increase following its two-day meeting, which would mark its first hike in more than three years. The central bank is under pressure to respond to inflation that jumped to a four-decade high of 7% in December.
Stocks ticked higher after the release of the statement, even as investors have been spooked in recent weeks that the Fed could soon turn off the spigot of cheap money, leading them to file out of riskier assets, including some stocks. It’s likely that the Fed’s signal that it will increase rates in a measured fashion gave investors some comfort in the wake of Wednesday’s statement, giving them the green light to jump back into the market.
By midafternoon trade, the Dow Jones Industrial Average was up 325 points, or around 1%, at 34,623; before the statement, it was trading around 34,600.
The Federal Open Market Committee did not specify when the increase will occur, though based on the central bank’s guidance, it’s likely to come in mid-March as the rate-setting committee doesn’t meet in February.
“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 FOMC’s statement said.
The FOMC also indicated it would “reduce the monthly pace of its net asset purchases, bringing them to an end in early March.” The statement did not say when the Fed will begin its effort to pare down its nearly $9 trillion balance sheet.
The initial hike in March is unlikely to have a major impact on the average American’s personal finances – though the pain could increase as the Fed is expected to enact further hikes in the months ahead.
“A small increase or two spread out over several months isn’t going to rock most people’s financial worlds,” said Matt Schulz, chief credit analyst at LendingTree. “The bigger danger is further down the line, as several small rate hikes begin to add up. However, for folks with a lot of debt, any increase in interest is unwelcome.”
The market has been bracing for the Fed’s course correction since December, when minutes the Fed’s FOMC showed officials were planning to raise rates sooner than expected due to rising inflation and tight labor conditions. The Fed has long signaled that it was waiting for the labor market to achieve “maximum employment” prior to rate hikes.
The central bank has been under intense scrutiny over its handling of the inflation crisis, which has resulted in Americans paying steep prices for necessities such as food, gas and rent.
Some critics argue that it has been too slow to respond, while others argue aggressive hikes could curb the US economy’s rebound from the COVID-19 pandemic.
Now, the central bank is “faced with choosing the lesser of two evils,” according to Danielle DiMartino Booth, CEO and chief strategist of Quill Intelligence.
“The Fed’s biggest challenge is figuring out how to implement policy measures that are hawkish enough to lower inflation, but that also keep financial markets afloat, because volatility in financial markets may bleed into an economy that is already showing signs of slowing,” DiMartino said.
Fed officials are expected to enact several small interest rate hikes over the course of 2022. Goldman Sachs currently forecasts hikes in March, June, September and December, though the bank noted the Fed could raise rates more than four times if inflation continues running hot.
JPMorgan Chase CEO Jamie Dimon expressed a similar view, telling CNBC earlier this month that he would be “surprised” if the Fed stopped at four rate hikes this year.
Investors have also been shedding riskier assets, including certain tech stocks and cryptocurrencies, as they prepare for the Fed to dial back its support for the economy.
A weeks-long losing streak for US stocks appeared ready to intensify on Monday, when the Dow initially plunged more than 1,000 points over concerns about the Fed’s decision and geopolitical tensions over the possibility that Russia could invade Ukraine. However, major indices staged a furious late rally and turned positive.
The volatility continued Tuesday, when stocks seesawed throughout the day before closing lower. The S&P 500 flirted with correction territory, defined as a 10 percent drop from its most recent high.
Meanwhile, the Senate is expected to confirm Federal Reserve Chair Jerome Powell, who is seeking confirmation for a second four-year term, with bipartisan support in February.
During his confirmation hearing before a Senate panel in January, Powell indicated the Fed was ready to take aggressive action to curb inflation.
“If we see inflation persisting at high levels longer than expected, if we have to raise interest rates more over time, we will,” Powell said at the time. “We will use our tools to get inflation back.”
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