"Fed Signals March Rate Hike 'Soon'" (Update)

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] The U.S. central bank, the Federal Reserve (Fed), indicated a rate hike in March. Regarding the balance sheet reduction, it did not specify a concrete timeline but disclosed a principle to reduce it in a predictable manner.

On the 26th (local time), the Fed announced after the Federal Open Market Committee (FOMC) regular meeting that it would keep the benchmark interest rate unchanged at the current level (0.00~0.25%).

The FOMC assessed the recent economic situation, stating, "Economic activity and employment indicators continue to be strong but are affected by COVID-19," and "Supply-demand imbalances related to the pandemic are causing price increases." It also noted, "Inflation is expected to improve with expanded vaccination and easing supply constraints," but added, "Risks to the economic outlook remain due to variant viruses."

The signal for an imminent rate hike was also made clear. The FOMC said, "Inflation is well above the 2% target, and the labor market is strong, so it is appropriate to raise the target range for the interest rate 'soon'." Although it did not mention a specific date, a hike is likely at the March FOMC meeting when tapering ends. This would be the first hike since December 2018.

The statement did not include hints about the size of the rate hike. The market is considering the possibility that the Fed, struggling with inflation, might surprise with a 0.5 percentage point increase at once. The dot plot was not released at this first FOMC meeting of the year. The dot plot published in December last year had forecasted an average of three hikes in 2022.

The ongoing tapering (asset purchase reduction) will proceed as previously announced at $30 billion. The Fed had doubled the tapering amount from $15 billion each in November and December last year starting this month. If this continues, the bond purchase program will conclude in March. Local media reported that the rate hike will coincide with the end of tapering.

Regarding the balance sheet reduction, which the market is closely watching, the Fed also disclosed a separate stance to reduce it "in a predictable manner." However, it did not specify when or to what extent the nearly $9 trillion expanded balance sheet will be reduced. The FOMC mentioned, "Balance sheet reduction is expected to begin after the process of raising the federal funds rate target range starts."

On the day, following the statement that the Fed may raise rates in March, the Dow Jones Industrial Average surged by 200 points, and all three major indices showed upward trends in the New York stock market. The benchmark U.S. 10-year Treasury yield rose to 1.7995% after 2 p.m.

This content was produced with the assistance of AI translation services.