Fed to start raising key interest rate from March to tame inflation

US central bank's latest policy statement comes as stock market investors were gripped by fear and uncertainty over just how fast and far the Fed will go to reverse its low-rate policies.

The gravest risk is that the Fed’s abandonment of low rates could trigger another recession, analysts say.
AP

The gravest risk is that the Fed’s abandonment of low rates could trigger another recession, analysts say.

The Federal Reserve has signalled that it plans to begin raising its benchmark interest rate as soon as March, a key step in reversing its pandemic-era low-rate policies that have fuelled hiring and growth but also escalated inflation.

With high inflation squeezing consumers and businesses and unemployment falling steadily, the Fed also said on Wednesday it would phase out its monthly bond purchases, which have been intended to lower longer-term rates, in March.

The Fed’s actions are sure to make a wide range of borrowing - from mortgages and credit cards to auto loans and corporate credit - costlier over time. 

Those higher borrowing costs, in turn, could slow consumer spending and hiring. 

The gravest risk is that the Fed’s abandonment of low rates could trigger another recession.

The central bank's latest policy statement follows dizzying gyrations in the stock market as investors have been gripped by fear and uncertainty over just how fast and far the Fed will go to reverse its low-rate policies, which have nurtured the economy and the markets for years. 

The broad S&P 500 index fell nearly 10 percent this month before rebounding slightly on Wednesday.

READ MORE: US consumer prices hit four-decade high in December

Political threat to Biden

High inflation has also become a serious political threat to President Joe Biden and congressional Democrats, with Republicans pointing to rising prices as one of their principal lines of attack as they look toward the November elections.

Yet Biden said last week that it was “appropriate” for Chair Jerome Powell to adjust the Fed’s policies. 

And congressional Republicans have endorsed Powell’s plans to raise rates, providing the Fed with rare bipartisan support for tightening credit.

A separate potential source of higher rates is the Fed’s plans for its bond holdings, which are at a record high of nearly $9 trillion. 

The bond purchases, which the Fed financed by creating money, have been intended to reduce longer-term interest rates to spur borrowing and spending. 

READ MORE: Joe Biden blames high US inflation on COVID’s effect on supply chain

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Criticisms over Fed policies

Some economists have expressed concern that the Fed is already moving too late to combat high inflation.

Others say they worry that the Fed may act too aggressively. 

They argue that numerous rate hikes could unnecessarily slow hiring. 

This week’s Fed meeting comes against the backdrop of not only high inflation - consumer prices have surged 7 percent in the past year, the fastest pace in nearly four decades - but also an economy gripped by another wave of Covid-19 infections.

Powell has acknowledged that he failed to foresee the persistence of high inflation, having long expressed the belief that it would prove temporary. 

The inflation spike has broadened to areas beyond those that were affected by supply shortages - to apartment rents, for example - which suggests it could endure even after goods and parts flow more freely.

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