The first increase in the Fed’s benchmark interest rate, or fed funds rate, could come soon— maybe as early as March—to help rein in inflation, Federal Reserve Chair Jerome Powell said in a press conference following the central bank’s latest policy meeting. The Fed plans to end in early March its emergency asset-purchasing program, which helped keep long-term rates low and ensured that money continued flowing through the economy during the pandemic. The end of asset purchases is widely seen by economists as a precursor to rate hikes. The fed funds rate, which had been slashed to between 0% and 0.25% to encourage borrowing when the pandemic hit in 2020, influences interest rates for a range of consumer loans, from autos and home mortgages to credit cards. Higher rates are meant to cool demand and tamp down inflation in an overheated economy. With consumer prices rising in December by 7% from a year earlier—the fastest pace since 1982—raising rates and cutting off support for the already expanding economy have taken on more urgency. After letting inflation run above the central bank’s 2% target since early 2021, the Fed has shifted its focus to fighting higher prices as inflationary pressures spread throughout the economy. At the last policy meeting in December, most Fed members expected three increases in the benchmark rate this year and forecast that inflation would decline. On Wednesday, though, Powell sounded less sure that inflation would subside, pointing to ongoing supply-chain bottlenecks, which have already contributed to higher prices. Powell said “there is a risk that the high inflation we’re seeing will be prolonged—there is a risk that it will move even higher.” Meantime, the unemployment rate has slipped below 4%, and the number of people quitting jobs—often seen as a sign of a tight labor market, as people feel confident they can find another position—has soared to hover near the highest levels on record. In essence, the labor market has healed enough from the pandemic downturn that interest rates can start to be raised to tackle inflation without fear of killing the jobs recovery, the Fed said. “I think there is quite a bit of room to raise interest rates without threatening the labor market,” Powell said. Once the cycle of rate increases begins, the Fed said it expects to start shrinking its balance sheet, which is loaded with the massive bond purchases the Fed made supporting the economy during the pandemic. Trimming the balance sheet is yet another measure meant to help boost long-term rates and cool the economy. Have a question, comment, or story to share? You can reach Medora at medoralee@thebalance.com.
