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Federal Reserve is ready to boost interest rates in March as inflation worsens

“There is quite a bit of room to raise interest rates without hurting the labor market,” Fed chairman Jerome Powell said.

Federal Reserve chairman Jerome Powell.Graeme Jennings/Bloomberg

The Federal Reserve is ready to pull the trigger in its high-stakes fight against inflation.

Wrapping up their first two-day meeting of the year on Wednesday, central bank policy makers said in a statement that “it will soon be appropriate” to increase interest rates, the most powerful tool they have to bring down soaring consumer prices.

Fed Chairman Jerome Powell, speaking later at a virtual news conference, all but promised that officials would begin hiking the benchmark federal funds rate following their next scheduled session on March 15-16. It would be the Fed’s first bump up in rates since 2018.

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The Fed’s guidance on rates was largely in line with Wall Street expectations. Consumer prices climbed last month at the fastest pace since the early 1980s, and Powell has been signaling for weeks that the central bank would have to turn its attention to inflation after focusing on bolstering the economy and job market.

The fed funds rate has been pinned near zero since March 2020 as the central bank sought first to blunt the impact of the COVID recession, and later to sustain the recovery and expand employment. Now just about anyone who wants a job can get one.

“The economy no longer needs sustained monetary-policy support,” Powell said on Wednesday.

When rates rise, the cost of borrowing to buy a home or a car goes up, as does the cost for businesses to borrow for expansion. By taking some steam out of the economy, the Fed hopes to ease the pressure on prices, making staples such as food, energy, and housing easier to afford.

Powell said he and his colleagues haven’t decided how quickly or how much rates should rise. In forecasts issued in December, members of the Fed’s open market committee penciled in three 0.25 percentage-point rate increases this year and three more in 2023.

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Some investors are worried that the Fed will be even more aggressive, a concern that was reinforced Wednesday when Powell said inflation is a “serious problem” that had gotten somewhat worse since the forecasts were made.

Powell sought to reassure markets that the Fed has the ability to take down inflation without overshooting, or tipping the economy into a jobs-killing recession.

Noting that there are far more job openings than there are unemployed workers, he said, “There is quite a bit of room to raise interest rates without hurting the labor market.”

For now, officials are leaving the range for their benchmark interest rate at 0 to 0.25 percent, where it has been since the pandemic hit. The Fed likes to give financial markets plenty of notice when rates are going to change.

Still, stocks fell during the news conference, giving up substantial gains from earlier in the day. The Standard & Poor’s 500 index, which had been up more than 1 percent, ended the day with a slight loss. Big swings in the stock market have increased in recent weeks as investors try to come to grips with the Fed’s planned moves.

The yield on 10-year Treasury note, which moves in the opposite direction of its price, rose to 1.875 percent, up from 1.03 percent a year earlier and just shy of its recent high last week.

But bond yields have moved gradually higher since the summer in anticipation of Powell’s rate pivot. “Bond investors have priced in the Fed rate increases,” said Bruce Monrad, chairman of Northeast Investors Trust in Boston, a fixed-income investment firm. “There’s not yet a panic that he will overshoot.”

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Two main factors are responsible for soaring consumer prices: Supply chain disruptions caused by COVID, and the extraordinary amount of stimulus money Congress delivered to American households.

Fed officials can’t fix the supply problems, but they can drain money from the economy to prevent it from overheating.

The central bank has nearly wound down its massive purchases of Treasury bonds and mortgage securities. The buying program was initiated early in the pandemic to keep money coursing through financial markets. That extra support for the economy is no longer needed. The Fed said it will reduce its purchases next month and end them in March.

In a separate statement, the Fed said it expects to begin reducing its massive $9 trillion in holdings “after the process of increasing the target range for the federal funds rate has begun.”

In their statement, Fed officials painted a mostly healthy picture of the economy. They said growth and employment have continued to strengthen.

“The sectors most adversely affected by the pandemic have improved in recent months but are being affected by the recent sharp rise in COVID-19 cases,” the statement said. “Job gains have been solid in recent months, and the unemployment rate has declined substantially.”

Powell said the economy nonetheless faces several risks, and Fed officials would have to be flexible to address them. They include inflation persisting longer and at a higher rate than the Fed currently expects, the course of the pandemic, and further disruptions to product production and distribution.

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“We can’t forget that there are risks on both sides,” he said, referring to being too aggressive or too passive with rate hikes.

It won’t be easy for the Fed to navigate the line between sustaining economic growth while raising interest rates. The big complication, of course, is COVID. The pandemic triggered a sharp but short recession, followed by a rapid recovery.

Then the Delta variant restrained the economy last summer, and Omicron has done the same since the December holidays. The Fed has been whipsawed just like the rest of us.

“It’s all unfolding with unusual velocity,” said Brian Bethune, an economist at Boston College. “The Fed has to change its tone and body language along with how fast the economy has changed.”

Since becoming Fed chairman in 2018, Powell has done an impressive job.

Can he be nimble enough to cool inflation and keep the economy chugging along while reacting to whatever COVID might throw at us next?


Larry Edelman can be reached at larry.edelman@globe.com. Follow him on Twitter @GlobeNewsEd.