The Federal Reserve on Wednesday sent a clear message that it intends to raise its interest rate target at its next meeting in March.
The central bank left its interest rate target unchanged at a range zero to 0.25 percent at the conclusion of the two-day meeting of the Federal Open Market Committee. But it said in a statement that it “expects it will soon be appropriate to raise the target range for the federal funds rate.”
The Fed said that economic indicators have been signaling that the economy has “continued to strengthen,” while taking note that sectors hardest hit by the pandemic have recently been dented by the sharp rise in Covid cases in recent weeks.
The Fed also took note of “elevated levels of inflation” that it says are related to “supply and demand imbalances related to the pandemic and the reopening of the economy.” That may be interpreted as a dovish message more aligned with the view that inflation is transitory rather than the emerging consensus that inflation is likely to be less tractable than economists expected for much of last year.
The language that has led the Fed’s statement since the pandemic hit last year was dropped. “The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals,” had been the lede since march of 2020. Now it is gone.
There was no change in the Fed’s schedule to reduce its bond purchases and no clarification of the Fed’s plans to begin to shrink its balance sheet once the taper is complete.
Derivative prices currently imply approximately four rate hikes this year, which would be one every other meeting of the FOMC. Higher than expected inflation, however, could pressure the Fed to raise rates more quickly.