Fed officials hail March rate hike as pace of inflation picks up

Jan 13 (Reuters) – Federal Reserve policymakers said this week they would start raising U.S. interest rates in March to tackle inflation that is eroding the value of workers’ recent wage gains and putting policymakers policies in the political spotlight.

In what was among the last public comments from U.S. central bankers ahead of their next rate-setting meeting, Fed Governor Lael Brainard on Thursday became the latest and highest-ranking U.S. central banker to signal that the current era interest rates close to zero will come to an end. end after two years of pandemic.

The Fed “has planned several rate hikes over the course of the year,” Brainard told the Senate Banking Committee, which is considering her nomination by U.S. President Joe Biden to become vice chairman of the Fed.

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“We will be able to do that … as soon as our purchases are complete,” she said, referring to a separate Fed asset purchase program that is due to end in March, opening the door to a possible rate hike at the March 15-16 Fed policy meeting.

The Fed announced in December its intention to buy its last tranche of government securities in February, earlier than it had expected a month earlier.

With inflation up 7% in December from a year earlier — the fastest pace in nearly 40 years — Fed policymakers are eager to do more, sooner, with rate hikes expected in the coming months and plan to rapidly reduce the Fed’s nearly $9 trillion pool of assets taking shape.

“We are clearly in a situation where the monetary policy stance is off-track” to inflation, Chicago Fed President Charles Evans said Thursday at an event hosted by the Milwaukee. Business Journal.

He called policymakers’ recent projection of three-quarters of a percentage point rate hike in 2022 “a good opening bid”, but added “it could be four if the data doesn’t improve fast enough. “.

It was a common refrain this week as officials appeared to have firm plans for higher borrowing costs in March and put the possibility of a fourth hike in 2022 on the line.

This week is the last before Fed officials enter a comment blackout ahead of their Jan. 25-26 policy meeting.

No policy change is expected then, as central bankers don’t want to send confusing signals by raising rates while they are still buying assets, or risk market disruptions by abruptly ending the rate-buying program. active even earlier than expected.

But Fed policymakers could use the session to lay the groundwork for a March “lift-off” of the near-zero key rate held during the crisis triggered by the coronavirus pandemic.

The Federal Reserve Building on Constitution Avenue is pictured in Washington, U.S., March 19, 2019. REUTERS/Leah Millis/File Photo

“My forecast is that we would have a 25 basis point increase in March, barring changes in the data,” Philadelphia Fed President Patrick Harker said at a virtual event hosted by the Philadelphia Business Journal earlier. Thursday.

“Takeoff in March … seems like a very reasonable thing to do,” San Francisco Fed President Mary Daly told Reuters on Thursday. Read more

Atlanta Fed President Raphael Bostic, St. Louis Fed President James Bullard and Cleveland Fed President Loretta Mester also announced March rate hikes on Wednesday.

BALANCE SHEET REDUCTION

In December, most Fed policymakers believed they would need to raise rates at least three times this year, but in recent weeks – with inflation remaining well above the bank’s 2% target central and the labor market moving closer to its goal of full employment – they’ve honed on an early March.

With that decision now firmly on the table, many — including Brainard on Thursday — also signaled they want to start shrinking the Fed’s massive balance sheet this year. It would also remove political accommodation and reduce downward pressure on long-term borrowing costs.

Investors currently see an 86% chance that the Fed will raise its overnight rate at its March 15-16 policy meeting, according to CME Group’s FedWatch program. They are planning three more rate hikes this year.

Earlier this week, Fed Chairman Jerome Powell also backed firm monetary policy tightening this year, arguing that the strong economy “no longer needs or wants” as much stimulus despite soaring cases of COVID-19 due to the Omicron variant.

Harker said Thursday that he sees the Fed starting to reduce the size of its balance sheet in late 2022 or early 2023 and its final composition is still being debated.

Harker said on CNBC on Thursday afternoon that officials should begin to reduce balance sheet runoff after interest rates are “enough” above zero and that the glide path to reduce bond holdings should be ” steeper” than it was the last time the Fed unloaded its assets.

Governor Christopher Waller was well ahead of most of his colleagues in calling repeatedly last year for a March start of three rate hikes in 2022, and said Thursday that a rapid series of four or five hikes rates could be requested if inflation is not receding.

“Inflation has been higher for longer than any of us thought,” Waller told Bloomberg TV on Thursday. Once inflation subsides to around 2.5% – which he hopes by the end of this year – rapid rate hikes may no longer be necessary, he said.

Brainard, for his part, said the Fed will try to bring inflation down “as quickly as possible, but consistent with a sustained and strong recovery.”

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Reporting by Lindsay Dunsmuir, Jonnelle Marte and Ann Saphir; Editing by Andrea Ricci, Paul Simao, Diane Craft and Aurora Ellis

Our standards: The Thomson Reuters Trust Principles.


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