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On Wednesday, the Federal Reserve announced that while it would not raise interest rates in the near term, the first rate hike could occur by mid-March, following the central bank’s March 15-16 Open Market Committee meeting.
“This is going to be a year in which we move steadily away from the very highly accommodative monetary policy that we’d put in place to deal with the economic effects of the pandemic,” Fed Chairman Jerome Powell said at a press conference after the FOMC meeting.
The year began with a bearish stock market, whose indices were falling precipitously in anticipation of the Fed’s interest rate hike.
The Fed has begun to gradually cut public and private debt purchases and will end this program completely by the beginning of March. The FOMC meeting authorized a final debt purchase before ending quantitative easing, which purchased more than $120 billion a month in debt bonds and mortgage-backed securities.
The Fed’s asset portfolio has grown more than twice as large since March 2020, FOMC officials are discussing how to reduce the more than $9 trillion portfolio of securities, which grew by nearly $5 trillion over the past two years.
The FED will proceed to sell from debt bonds in the market to raise interest rates starting in March, which will drive up the cost of credit for both households and businesses in the U.S. economy, with the central bank expecting demand for U.S. goods and services to decline.
Despite the rate hike, at the FED, the effects of monetary contraction could take months to be felt in Americans’ market basket prices, normally it can take up to 18 months for the effects of a change in monetary policy to be felt in the economy.
Americans witnessed the largest wage increase seen in decades during 2021, nominal wages increased by 9.2%. Unfortunately, those gains were erased by inflation and Americans’ purchasing power remains the same as in 2019.
The FED has a complicated challenge, as markets have now become dependent on the liquidity provided by the easy money policy, however, the Central Bank must contain inflation. In 2013, when the FED announced that it would end the purchase of debt bonds (which began due to the 2008 crisis,) the financial markets crashed after the announcement fearing a decrease in liquidity.
According to The Wall Street Journal, the market has been anticipating the interest rate hike for months, so the corrections (falls and rises in stock prices,) should be less sharp than during 2013.
For months Powell maintained that there was no real need to raise interest rates because Central Bank officials believed that the rise in the price of many commodities was due to supply chain constraints.
With the change in narrative by the Central Bank, the market is anticipating a lower growth horizon where inflation (albeit lower in 2021) will persist for some time yet. Americans will have to get used to it
Economist, writer and liberal. With a focus on finance, the war on drugs, history, and geopolitics // Economista, escritor y liberal. Con enfoque en finanzas, guerra contra las drogas, historia y geopolítica