READY, SET – HIKE!
Fed hints at March rate rise
The Federal Reserve signaled plans Wednesday to raise its benchmark interest rate in mid-March as it attempts to cool an overheating US economy where inflation is stuck at 40-year highs.
The Fed teed up a quarter-percentage-point increase following its two-day meeting, which would mark its first hike in more than three years. The central bank is under pressure to respond to inflation that jumped to a four-decade high of 7% in December.
Marts lower
Even though the news was in line with expectations, stocks finished the day mostly lower.
The Dow Jones Industrial Average finished down 0.4% or 130 points lower. The S&P 500 closed down 0.1%. The Nasdaq Composite ended flat.
All three indexes had spent most of the day trading much higher before the post-announcement drop.
The Federal Open Market Committee did not specify when the increase will occur, though based on the central bank’s guidance, it’s likely to come in mid-March as the rate-setting committee doesn’t meet in February.
“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 FOMC’s statement said.
The FOMC also indicated it would “reduce the monthly pace of its net asset purchases, bringing them to an end in early March.” The statement did not say when the Fed will begin its effort to pare down its nearly $9 trillion balance sheet.
The initial hike in March is unlikely to have a major impact on the average American’s personal finances — though the pain could increase as the Fed is expected to enact further hikes in the months ahead.
Lesser of evils
“A small increase or two spread out over several months isn’t going to rock most people’s financial worlds,” said Matt Schulz, chief credit analyst at LendingTree. “The bigger danger is further down the line, as several small rate hikes begin to add up. However, for folks with a lot of debt, any increase in interest is unwelcome.”
The central bank has been under intense scrutiny over its handling of inflation, now driving up prices for essentials like food, gas and rent.
Some critics say it has been too slow to respond, while others say aggressive hikes could hurt the economy’s rebound from the COVID-19 pandemic.
Now, the central bank is “faced with choosing the lesser of two evils,” says Danielle DiMartino Booth, CEO and chief strategist of Quill Intelligence.
She said the challenge is “figuring out how to implement policy measures that are hawkish enough to lower inflation, but that also keep financial markets afloat, because volatility” could hurt an economy “already showing signs of slowing.”