NEW YORK (Reuters) — The Federal Reserve on Wednesday signaled it is likely to raise U.S. interest rates in March and reaffirmed plans to end its bond purchases that month before launching a significant reduction in its asset holdings. The combined moves will complete a pivot away from the loose monetary policy that has defined the pandemic era and toward a more urgent fight against inflation.
In a press conference Fed Chair Jerome Powell said officials will discuss plans for reducing the central bank’s nearly $9 trillion balance sheet at their next two meetings, adding he expects there to be a “substantial” amount of shrinkage in the Fed’s bond holdings, which would reverse pandemic-era “quantitative easing that stabilized financial markets and the U.S. economy. The market’s reaction:
STOCKS: The S&P 500 seesawed from a sharp gain to a loss of 1.03%.
BONDS: The 10-year U.S. Treasury note yield rose to 1.8386%, and the 2-year yield rose to 1.01266%; The 2s/10s yield curve flattened to 71.03 basis points after widening initially.
LEE FERRIDGE, MACRO STRATEGY HEAD, STATE STREET GLOBAL MARKETS, BOSTON
“The market got way ahead of itself. The Fed is not going to hike 50 basis points in March. The statement gently pushed against that. This statement brought us back to what they’ve been saying. The fact they haven’t confirmed the more hawkish view that the market was pricing in is why equities sighed a bit of relief. “The second thing to take away from this is that quantitative tightening will happen. The idea of the balance sheet reduction as now mentioned in the statement puts us on the table for June.”
MICHAEL PEARCE, SENIOR US ECONOMIST, CAPITAL ECONOMICS, NEW YORK
“The Fed’s announcement that it will “soon be appropriate” to raise interest rates is a clear sign that a March rate hike is coming. The Fed’s plans to begin running down its balance sheet once rates begin to rise suggests an announcement on that could also come as soon as the next meeting, which would be slightly more hawkish than we expected.”
BETH ANN BOVINO, U.S. CHIEF ECONOMIST, S&P GLOBAL RATINGS
“Today the Fed interest rate rocket left the hangar and is headed to the launchpad with what we believe is a March liftoff scheduled — the first of at least three hikes this year. Only question may be how high it flies, how fast and how many are launched? We see 3 one-quarter hikes, but another could hit this year with 3 next and 2 in 2024.“
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