The Federal Reserve on Wednesday signaled that it is ready to start raising interest rates for the first time since the central bank cut rates to near zero as the Covid-19 pandemic began in March of 2020.
Reiterating the Fed’s dual mandate of maintaining maximum employment and an inflation rate near 2% over the long run, the Federal Open Market Committee said in a statement that it will keep the federal funds rate at between 0% and 0.25% for now. However, with “inflation well above 2 percent and a strong labor market, the committee expects it will soon be appropriate to raise the target range for the federal funds rate,” the committee added.
At a virtual press conference, Federal Reserve Chair Jerome Powell said the “committee is of a mind to raise the Fed funds rate at the March meeting,” as long as conditions continue to warrant doing so. At the same time, both Powell and the committee emphasized that the central bank will continue to monitor conditions and adjust its policy path as needed.
The Fed also said that it intends to continue to reduce its asset purchases, ending the program that has provided extra liquidity for the markets in early March, as expected.
A more hawkish approach on inflation: Some critics say the Fed has been too slow in responding to an inflation rate that hit 7% last year, the highest level in decades. The hesitancy reflects in part the Fed’s interest in allowing the labor market, which is still millions of jobs shy of its pre-pandemic peak, time to gather strength.
On Wednesday, Powell said that the labor market is showing encouraging signs and should be able to withstand an interest rate increase. “I think there’s quite a bit of room to raise interest rates without threatening the labor market,” Powell said. “This is by many measures a historically tight labor market.”
Dione Swonk, chief economist at Grant Thornton, told The Washington Post that the Fed has changed its approach to inflation in a hurry. “The biggest issue is that the Fed moved in nearly a record amount of time from being patient, to being panicked, on inflation,” she said. “They want to turn the heat down a bit on the economy but not let the flame go out,” she added. “And that sounds good in theory, but in reality, it’s much harder to do, especially in a world where literally everything can change in the blink of an eye.”