Fed signals first US rate hike since pandemic coming in March

Federal Reserve Chair Jerome Powell made an unusually blunt statement that at interest rate hike is likely in March

The US central bank has pivoted policy to try to contain rising US inflation

Federal Reserve Chair Jerome Powell on Wednesday gave a clear signal the central bank is ready to raise US interest rates in March for the first time since cutting them to zero when Covid-19 broke out.

That would end the era of easy money that fueled Wall Street's record-setting run during the pandemic. 

"I would say the committee is of a mind to raise the federal funds rate at the March meeting, assuming that conditions are appropriate for doing so," Powell said in an unusually frank comment on the Fed's planned actions.

He noted the strong rebound in employment following the catastrophe caused by Covid-19.

The comments reflect the central bank's policy pivot as consumer prices rose seven percent in 2021, the highest since 1982. Officials late last year retreated from their insistence that inflation was transitory, and that rates could stay lower to ensure an inclusive recovery. 

Powell echoed those comments in his press conference, noting that "the drivers of higher inflation" were predominantly due to "the dislocations caused by the pandemic," and "we continue to expect it to decline over the course of the year."

While signaling a March increase, the FOMC left policy unchanged for now, keeping rates at zero and continuing moves to wind down its bond-buying stimulus program in early March.

The FOMC provided no timeframe but said it "expects that reducing the size of the Federal Reserve's balance sheet will commence after the process of increasing the target range for the federal funds rate has begun."

"We expect 'liftoff' to start in March with the first of at least three rate hikes this year," she said in a note, pointing to language indicating officials believe the US economy has hit "maximum employment," one of the Fed's two priorities.

Rate increases would end the party on Wall Street that has raged more or less non-stop during the pandemic thanks to the easy money policies the Fed rolled out to rescue the economy in March 2020.

Edward Moya, senior market analyst at OANDA, blamed Wall Street's downturn during the press conference on both fears of balance sheet normalization and on jitters about rate hikes.

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