All systems opt for the Fed raising interest rates

Band Howard Schneider

WASHINGTON, March 16 (Reuters)The Federal Reserve on Wednesday close the door to its ultra-easy monetary policy in the era of the pandemic and intensify the fight against stubbornly high inflation with the first in what is likely to be a series of interest rate hikes This year.

The change, starting with an expected increase of a quarter of a percentage point in the U.S. central bank’s benchmark overnight interest rate, has been in the works since last fall and has already driven up the cost of home mortgages and other key types of credit in anticipation of what the Fed will do to rein in rising prices at their fastest pace in 40 years.

Yet the urgency surrounding the Fed policy meeting this week has intensified because inflation has shown no signs of appeasement and could even rise further following Russia’s invasion of Ukraine, which fueled a spike in oil prices this month.

The precise language of the new Fed policy statement and the details of updatequarterly projections of the economy and interest rates will provide the first concrete indications of how all of this has influenced policymakers, and in particular whether it has shaken faith that the current economic expansion can stay on track even if inflation is reduced.

Fed Chairman Jerome Powell, speaking to congressional lawmakers earlier this month, said he believed it was “more likely than not that we can achieve what we call a soft landing…that is, getting inflation under control without a recession”.

But he also acknowledged that the central bank was on uncertain ground, perhaps more reminiscent of the high inflation era of the 1970s than the low inflation backdrop that has shaped monetary policy since the early 1990s.

“We haven’t taken on this challenge for a long time,” Powell said. in his testimony before the Financial Services Committee of the United States House of Representatives. “But we all know the story and we all know what we have to do.”

the new projections to emit next to the policy statement at 2 p.m. EDT (18:00 GMT) will show how aggressive officials think they should be and if decision makers see the target federal funds rate reaching the kind of restrictive levels that could actually cripple the economy and increase unemployment.

Since Financial crisis and recession of 2007-2009the Fed only implemented these kinds of restrictive policies once, in response to former President Donald Trump’s increased deficit spending in 2017 and 2018, but rates have never risen this high before the economy begins to collapse.

Inflation is now the motivation. The Fed’s preferred indicator of price pressures is currently rising at an annual rate that is triple the central bank’s 2% target, and the war environment, rising energy costs and escalation wages drew parallels to the 1970s and early 1980s when the Fed pushed the economy into recession to break the cycle.

If the COVID-19[female[femininethe pandemic has led to an unpredictable economy, developments in Europe to have made the situation almost Byzantine when it comes to forecasting.

The price of US crude West Texas Intermediate CLc1, for example, rose around 33% to $123 a barrel in the days following Russia’s Feb. 24 attack on Ukraine. By Tuesday, it had fallen back to around $95 a barrel, close to its pre-war level.

But this decline was driven largelyby new confinements linked to the coronavirus in China that could cause their own economic problems – including more inflation.

The situation “couldn’t be worse for the Federal Reserve, which is already chasing inflation for the first time since the 1980s. chef at GrantThonton. .

Powell “will be walking a tightrope, balancing the need to raise rates and rein in a more systemic rise in inflation with the need to avoid a meltdown” if the central bank raises rates so quickly that it could risk a recession, she added.

AN “AGILE” APPROACH

Powell must hold a press conference half an hour after the publication of the policy statement and projections. Along with giving details of the statement, he will likely provide an update on discussions about when and how quickly to cut the Fed’s roughly $8.5 trillion government portfolio. bonds and mortgage-backed securities, a second monetary policy tightening tool to be deployed later in the year.

Powell used words like “agile” to describe his approach to a situation in which policymakers might have to adapt on the fly, and in which they were repeatedly misled by economic developments, from a more faster than expected to the slow return of workers to jobs.

The language of the new policy statement and the details of the new projections, however, will highlight the Fed’s broader thinking.

In December, most Fed officials thought they could get inflation under control with a relatively light touch that involved raising the target federal funds rate, currently close to zero, to just 2.1% by the end of 2024, a level that is still not considered restrictive by policymakers.

But policymakers at that time also estimated that inflation for 2022 would be just 2.6%, and that it would decline as the US and global economies functioned. supply chain issues and other issues created by the pandemic – a perspective that also turns out to be off.

Given the level of inflation, “the message must be at least somewhat hawkish,” Evercore ISI analysts Krishna Guha and Peter Williams wrote, though volatile events in recent weeks mean officials will also want to stress “that now more than ever nothing is set in stone.”

Fed projections and long-term rateshttps://graphics.Reuters.com/USA-FED/FOMC/xmvjoemrypr/

Fed projections for the long-term ratehttps://tmsnrt.rs/3waficm

Lagged Fed projectionshttps://graphics.reuters.com/USA-FED/SEPS/gkplgaylgvb/

The Fed is playing catch-uphttps://tmsnrt.rs/3IbCNDW

Fed policy and inflationhttps://graphics.Reuters.com/USA-ECONOMY/FEDFUNDS/xmvjoegjnpr/

The Fed’s policy rate and inflation hit a record high The Fed’s policy rate and inflation hit a record high gaphttps://tmsnrt.rs/3IhQPoz

(Reporting by Howard Schneider Editing by Paul Simao)

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Leslie M. Gill