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Federal Reserve signals March interest rate rise to combat soaring inflation

·2-min read
Fed Reserve
Fed Reserve

The Federal Reserve laid the groundwork for its first interest rate rise since 2018 in March as it promised to take action to tackle America’s living costs crunch.

The US central bank’s rate-setters signalled rates will be lifted at their next meeting as American households are battered by inflation of 7pc, the highest level since 1982.

Fed chair Jerome Powell said the US economy “no longer needs sustained high levels of monetary policy support” as he admitted the price surge has been “larger and longer lasting than anticipated”.

The Fed’s policymakers voted to keep interest rates unchanged at a rock bottom range of 0pc to 0.25pc and will end its massive bond-buying stimulus in early March.

However, they said that the jobs market’s “remarkable progress” and the inflation rate soaring “well above” 2pc will allow them to raise borrowing costs “soon”.

A rate rise in March will be the first since 2018, with markets betting that the Fed will lift borrowing costs four times this year.

Mr Powell said there was very broad support on the Fed’s rate-setting committee for hiking borrowing costs to contain the surge in inflation as price rises hammer the approval ratings of President Joe Biden. Mr Powell warned the surge in omicron cases could worsen supply chain and inflation woes as price pressures are “exacerbated by waves of the virus”.

He said: “I would say that 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.”

Ian Shepherdson, chief economist at Pantheon Macro, said there will be a “March hike unless the sky falls in”.

He said: “The statement is notably relaxed about the impact of Omicron on the economy, ignoring the plunge in December retail sales and the slowing in payroll growth.”

Richard Flynn, of wealth manager Charles Schwab, said: “The challenge for the Fed is to try to slow inflation without tipping the economy into a recessionary downturn.

“The Fed may come under pressure from hawkish investors who are concerned that it could be doing more to keep inflation under control.”

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