Federal Reserve leaves interest rates on hold, but March rise looks likely – as it happened

26 Jan 202216.20 EST

Full story: US Federal Reserve indicates increase in interest rates as inflation rises

Dominic Rushe

The Federal Reserve is preparing to raise rates in March for the first time since the coronavirus pandemic struck the US as it attempts to curb rising prices.

After its latest two-day meeting the central bank announced that it would leave interest rates close to zero for now but signaled it was preparing to raise them at its next meeting.

At a press conference, Fed chair Jerome Powell said the central bank would continue to monitor the course of the pandemic, inflation and unemployment but gave his clearest signal yet that the US’s historically low interest rates would start to rise soon.

“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,” said Powell.

“The economy no longer needs sustained monetary policy support.”.

The central bank cut rates to close to zero when the coronavirus pandemic hit the US in March 2020 and began pumping money into the economy by buying financial assets in order to stave off a potential financial collapse. At this week’s meeting, the Fed committee approved one final round of asset purchases, which will bring that stimulus program to a conclusion by March.

The Fed has a dual mandate: to maximize employment and to keep prices stable.
In recent months inflation has risen sharply to an annual rate of 7% and the unemployment rate has fallen back 3.9%, close to pre-pandemic levels. It has signaled for months that rate rises are coming in order to tamp down price rises and Powell said there was “quite a bit of room to raise interest rates without threatening the labor market”.

But the end of the Fed’s easy money policy has rattled investors.... Here’s the full story:

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And finally, Wall Street has closed slightly lower, as Jerome Powell’s hawkish comments on US interest rates brought an end to today’s rally.

The Dow Jones industrial average of 30 large US companies ended the day 0.4% lower at 31,168 points, down almost 130 points today.

The broader S&P 600 index dipped by 0.15%, losing 6.5 points to end at 4,349.93.

The tech-focused Nasdaq Composite ended flat, having already fallen by over 13% so far this year.

Yash Chauhan, analyst for Global Capital Markets for Validus Risk Management, says the Fed could raise US interest rates three or four times this year:

The FOMC statement seemed neutral triggering a rally in equities, and a muted reaction in the dollar and treasuries.

“However, yields rose and equities reversed all gains as Powell’s speech slowly took a hawkish turn after he mentioned that the US is in a “historically tight labor market’ and there is “quite a bit of room to move without hurting jobs”.

“Powell stopped short of sharing any timeline in terms of a rate hike and balance sheet reduction but signaled that the FOMC is open to raising rates in March.

“He also mentioned that they feel “communications with market participants are working” suggesting that the Fed is probably comfortable with what the market is pricing for the year.

“Overall, we are more hawkish after Powell’s speech and feel that 3-4 hikes this year is very much a possibility.”

On that note, goodnight.

Jerome Powell has struck “a much more hawkish note than the more tepid monetary policy statement”, says Matt Weller, global head of research at FOREX.com and City Index.

Powell made it as clear as possible that the Fed was willing to start raising interest aggressively, starting as soon as the next FOMC meeting, and continue doing so until inflation showed signs of falling.

Charles Hepworth, investment director at GAM Investments, sums up today’s Fed statement:

What we learnt was the Fed are still set to end the asset purchase facility by early March and will look to shrink their balance sheet at some undefined point in the future, after they have started hiking rates. They also noted that with inflation being now far from transient, the appropriateness of raising rates soon is imperative.

All in all, there was not much in their statement to spook markets that hadn’t already been priced in – nor was it a walk-back of previous hawkish comments that would have otherwise threatened their credibility.”

Simon Harvey, head of FX Analysis at Monex Europe, says market volatility increased during Powell’s press conference, as the Fed chair stressed the strength of the US labour market and the room provided by its recovery to raise rates:

By stating that “there is plenty of room to raise rates”, Powell, who is known for his select choice of words to cast a relatively neutral tone, sparked a further sell-off in the US bond market, which sent front-end yields to fresh post-pandemic highs of 1.09% and intermediate yields back up towards recent highs near the 1.7% level.

The increased expectation of rate hikes by the Fed, as evidenced in the rise in US Treasury yields, weighed on US equity markets and sent the dollar bid across both the G10 and EM space.

Despite being fairly noncommittal for the remainder of the press conference with regards to the timing, pace and impact of quantitative tightening, the damage has already been done in financial markets due to the commentary suggesting a steeper rate path relative to that of 4 rate hikes this year prior to the meeting in what was meant to be one of the plainer sailing Fed meetings.

Stocks have fallen into the red on Wall Street, after Fed chair Powell suggested there is ‘quite a bit of room’ to raise interest rates without threatening the labor market.

Jerome Powell is sounding hawkish as he is quizzed by reporters about the Fed’s plans.

He suggests there is a lot of room to increase interest rates without hurting the jobs market, and doesn’t reject the idea that interest rates could rise at consecutive meetings

[the Fed has eight scheduled meetings a year, and analysts had thought rate rises could come at every other meeting].

Asked if the FOMC could raise interest rates by 50 basis points, rather than 25 basis points, Powell says he can’t say what the precise path will be, and such decisions haven’t been taken.

But the Fed is aware this is a different expansion than in previous cycles. There is higher inflation, higher growth, and a much stronger economy. That is likely to be reflected in the policy path.

Jerome Powell doesn’t have much more information on the Fed’s approach to reducing its balance sheet, on top of the principles published today.

Policymakers haven’t had much discussion about the details yet, he explains, but will spend time on it at coming meetings.

But he does suggest the Fed could perhaps move sooner and faster than before. The economy is in a different place than in 2015, the last time it began tightening monetary policy.

Jerome Powell explains that both sides of the Fed’s mandate (price stability and maximum employment) are calling for a move away from highly accommodative policy.

There is ‘broad agreement’ on the FOMC that it will soon be time to raise rates, he explains.

And that first rate rise could come in March, Powell signals, despite the impact of Omicron, and global risks.

He says:

“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.

We have our eyes on the risks, particularly around the world.

We do expect some softening in the economy from omicron, but we think that should be temporary and we think the underlying strength of the economy should show through fairly quickly after that.

Federal Reserve chair Jerome Powell is holding a press conference now to explain today’s decision.

He says the US economy has shown great strength, cautioning that the omicron variant will hurt economic growth in the current quarter, but is also expected to drop off rapidly.

If the latest wave of Covid-19 passes quickly, then the economic impact should dissipate too.

The labour market has shown remarkable progress, Powell continues, with historically strong labour demand and wages rising at the fastest pace in many years.

Prices are also rising fast, of course. And here, Powell says high inflation has spread more broadly, but is expected to decline over the course of the year.

And in the light of inflation and employment developments, the economy no longer needs sustained high level of support, he explains - adding that the Fed needs to be nimble and remain attentive to risks.

The Fed has also issued a statement outlining its principles for reducing the size of its balance sheet.

This is the process of unwinding some of the asset purchases which were conducted in the pandemic to support markets and lower long-term borrowing costs, after those purchases are phased out in March.

Those principles show that the Fed expects to “significantly” reduce its balance sheet, and that the process is expected to begin after it has started raising interest rates.

Here’s the list, which doesn’t appear to have any surprises:

• The Committee views changes in the target range for the federal funds rate as its primary means of adjusting the stance of monetary policy.
• The Committee will determine the timing and pace of reducing the size of the Federal Reserve’s balance sheet so as to promote its maximum employment and price stability goals. The Committee 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.
• The Committee intends to reduce the Federal Reserve’s securities holdings over time in a predictable manner primarily by adjusting the amounts reinvested of principal payments received from securities held in the System Open Market Account (SOMA).
• Over time, the Committee intends to maintain securities holdings in amounts needed to implement monetary policy efficiently and effectively in its ample reserves regime.
• In the longer run, the Committee intends to hold primarily Treasury securities in the SOMA, thereby minimizing the effect of Federal Reserve holdings on the allocation of credit across sectors of the economy.
• The Committee is prepared to adjust any of the details of its approach to reducing the size of the balance sheet in light of economic and financial developments.

Stocks on Wall Street are still up for the day, with the Nasdaq Composite up 2.5% or 351 points at 13,888.