By Howard Schneider and Ann Saphir
WASHINGTON (Reuters) -The Federal Reserve on Wednesday signaled it is likely to raise U.S. interest rates in March and reaffirmed plans to end its bond purchases that month as well before launching what was characterized as a significant reduction in its asset holdings.
The combined moves will complete the U.S. central bank’s pivot away from the loose monetary policy that has defined the pandemic era and toward a more urgent fight against inflation.
“With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate,” the Fed’s rate-setting Federal Open Market Committee said in a unanimous statement after the end of a two-day policy meeting.
FOMC members also agreed on a set of principles for “significantly reducing” the size of the Fed’s massive asset holdings by limiting how much of the principal from maturing bonds it would reinvest each month. That plan would start after the liftoff in interest rates, the Fed said, without yet setting a specific date, pace or final size.
Over time the Fed’s nearly $9 trillion balance sheet would not only be pared down, but shifted away from mortgage-backed securities and weighted towards U.S. Treasuries, “thereby minimizing the effect of Federal Reserve holdings on the allocation of credit across sectors of the economy,” the central bank said.
The Fed’s statement, in moving ahead with a plan to tighten monetary policy, cited “solid” recent job gains that continued even as the outbreak of the Omicron variant of the coronavirus pushed daily case numbers to record levels. While the Fed has stopped trying to assess when inflation might ease, the statement said officials continue to expect improvements in global supply chains will ease the pace of price increases.
Other risks have arisen in the weeks since the Fed’s Dec. 14-15 policy meeting, with Western nations fearing a possible Russian invasion of Ukraine and investors selling off stocks.
That was not mentioned in the policy statement nor did it detract from the Fed’s decision to push against inflation that has hit multi-decade highs.
“Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation,” the Fed said, with consumer prices increasing at a 7% annual rate, the highest level since the 1980s.
U.S. stocks, pummeled to start the year on worries about how fast the Fed might move to contain inflation, added to the day’s gains following the release of the statement. The S&P 500 index was more than 2% higher while the Nasdaq Composite, which had taken a hard blow in the January sell-off, was up 3.3%.
Yields on longer-dated Treasury securities edged higher and the dollar held on to modest gains against a basket of key trading partners’ currencies.
Policymakers did not release new economic and interest rate projections on Wednesday. In a news conference scheduled for 2:30 p.m. EST (1930 GMT), Fed Chair Jerome Powell is expected to continue bringing the central bank into line with public and market expectations that it will move more aggressively against inflation.
(Reporting by Howard SchneiderEditing by Paul Simao)
