The Federal Open Market Committee (FOMC) released its latest monetary policy statement on Wednesday (26th) suggesting that the Federal Reserve (Fed) will raise interest rates as soon as March to combat the highest inflation in decades.
The Fed, which has kept interest rates near zero and bought bonds since March 2020 to support the economy and financial markets, announced on Wednesday that it would keep its benchmark interest rate corridor unchanged at 0% to 0.25%.
The latest statement mentioned that with inflation well above 2% and a strong labor market, the committee expects to soon be appropriate to raise the target range for the federal funds rate.
U.S. economic activity continued to strengthen despite the emergence of a new variant of the virus, Omicron, with the Federal Reserve reiterating that it would end its tapering of its bond-buying (Taper) program in early March, suggesting the first rate hike since the outbreak could come within six weeks.
Looking ahead, the Fed released the principle of shrinking the balance sheet in another statement. The committee will not start the process of shrinking the balance sheet until after the start of the rate hike, and is ready to adjust the balance sheet to normalize according to the economic and financial development conditions. any details. No specific date, pace or final size has been set yet.
After the announcement, which was in line with market expectations, the fear index VIX fell, the 10-year U.S. Treasury yield edged higher, and the bond yield curve steepened. The Standard & Poor’s 500 index rose further, the dollar maintained its gains, and the gold price fell short-term.
Economists expect the Fed to prepare for a rate hike in March, and the fed funds futures market is pricing in a rate hike of four to five yards in 2022.
Michael Schumacher, director of rates strategy at Wells Fargo, said the Fed statement was innocuous, and the comments about the balance sheet reduction were largely expected, and it was a fairly moderate statement that didn’t require much digestion and investors could focus on Keep an eye on Ball’s press conference.
“It must have been a wild start to the year,” said Josh Chastant, senior investment analyst at GuideStone Capital Management. “That’s to be expected when the Fed moves from stimulus to less accommodative policy.”