US Federal Reserve keeps rates on hold, but signals multiple rises in 2022 to limit inflation

The US Federal Reserve has given the green light to lift interest rates as soon as March as it seeks to rein inflation in, brushing aside the impact of possible conflict in Ukraine.

The US Federal Reserve decision weighed on the Australian market on Thursday. Picture: AFP

The US Federal Reserve has given the green light to multiple increases to interest rates this year, starting in March, in a bid to drag inflation down from a 40-year high, brushing aside the ­impact of possible conflict in Ukraine on the global economy.

Resisting spelling out a timeline for rate increases, Fed chairman Jerome Powell said the inflation outlook had deteriorated further since December and he had a “strong sense” the central bank could “move rates up without severely undermining the economy”.

In its first meeting of 2022, the Federal Reserve Open Market Committee said inflation remained “well above” its 2 per cent target while unemployment had “fallen substantially”, paving the way for lift-off after almost two years of zero official interest rates in the world’s largest economy.

“The economy is in a very different place to when we began raising rates in 2015: it’s much stronger, labour market far stronger, inflation higher, these differences are likely to have ­important implications for appropriate pace of policy adjustments,” Mr Powell said.

The yield on US 10-year government bonds, which moves inversely to price, increased to 1.85 per cent, from 1.78 per cent earlier during his press conference, reflecting growing certainty among investors that the Fed will lift the federal funds rate as many as three or four time this year.

The Fed would increase rates “sooner and perhaps faster” than the last time it began to lift rates in 2015, for the first time since the global financial crisis.

“It will soon be appropriate to raise the target range for the federal-funds rate,” the Fed said in Washington on Wednesday, blaming inflation, which finished 2021 at a 40-year high of 7 per cent, on “supply and demand ­imbalances” caused by Covid-19.

The benchmark S&P 500 had added 1.45 per cent on Wednesday but pared back all the gains as Mr Powell spoke, as investors grappled with the prospect of higher interest rates and the possible economic fallout from a war between Russia and Ukraine.

“It’s definitely a wild start to the year,” said Josh Chastant, a senior investment analyst at GuideStone Capital Management.

The central bank took out a sentence it had used since March 2020 in its closely scrutinised statement to signal it would aggressively support growth amid an unprecedented global pandemic.

Traders in interest-rate futures markets are betting that the Fed will increase rates four or five times this year, according to CME Group, which would result in the federal funds rate rising from zero to more than 1 per cent.

Earlier this month JPMorgan chief executive Jamie Dimon predicted the Fed would increase its official rate “six or seven times”.

The Fed’s policy committee ended two days of deliberations against a backdrop of increasingly volatile financial markets and the growing prospect of war in Ukraine, which could disrupt the global economy as it recovers from the Covid-19 pandemic.

“The committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the ­attainment of the committee’s goals,” the statement said.

Brent crude, the international oil benchmark, rose above $US90 on Wednesday, reversing earlier falls that economists hoped would contribute to declining rates of inflation, which has become a toxic political issue for the Biden administration.

Joe Biden appeared to handball fixing the problem, which has become Americans’ No.1 concern and underpinned the President’s approval rating, to the Federal Reserve in a press conference last week. “A critical job in making sure that the elevated prices don’t become entrenched rests with the Federal Reserve, which has a dual mandate: full employment and stable prices,” Mr Biden said.

The Fed meeting follows elevated inflation around the world, including in Australia, where consumer prices rose 1.3 per cent in the December quarter to leave the index 3.5 per cent up over 2021, prompting forecasts the Reserve Bank would dump a promise not to increase the cash rate until 2024.