Fed Minutes Signal March Interest Rate Hike Still On Track

Topline

Minutes from the Federal Reserve’s most recent meeting showed that the central bank is still on track to raise interest rates next month but gave no indication about how aggressively officials would act to unwind pandemic-era stimulus measures, the prospects of which sparked a broad market selloff last month.

Federal Reserve Board Chairman Jerome Powell testifies before a Senate committee on Jan. 11.

ASSOCIATED PRESS

Key Facts

In a detailed summary of its late-January meeting, officials said it would “soon be appropriate” to raise interest rates beyond the range of 0 to 0.25%, where they’ve remained since April 2020.

Officials acknowledged that asset valuations were “elevated” across markets, with the S&P 500 index in particular near its most expensive levels in history, relative to corporate profits—something market participants were concerned could contribute to a future downturn.

In another effort to help curb inflation, meeting participants said they expect the Fed will have to begin reducing its nearly $9 trillion balance sheet by the third quarter, nearly a year and a half sooner than was expected in December.

Though officials didn’t say exactly when the rate hike would come, Fed Chair Jerome Powell said in a press conference late last month they were “of the mind” to raise rates at their next meeting in March, but wouldn’t decide until then.

Stocks were little changed in negative territory after the announcement, with the Dow Jones Industrial Average falling 172 points, or 0.5%, the S&P 500 0.4% and the tech-heavy Nasdaq 0.9%.

What To Watch For

The central bank’s next two-day policy meeting concludes on March 17, when officials are expected to announce if—and by how much—they’ll raise interest rates. Goldman Sachs economists project the Fed will announce seven consecutive 25-basis-point hikes at each of the remaining monetary policy meetings this year—more than double the three hikes many officials have forecast.

Key Background

Historically low interest rates and trillions of dollars in unprecedented government spending helped keep the economy afloat during the pandemic, but levels of historically high inflation have rattled the market in recent months—and even more so recently. The S&P 500 index has fallen 7.5% this year amid growing concerns over interest rate hikes, which tend to hurt company earnings and stock prices. “The Fed has a very narrow path to guide the economy back to one where inflation is lower but growth does not slow meaningfully, and I think that the path got even narrower,” Deutsche Bank chief U.S. economist Matthew Luzzetti told Politico on Friday, after the Labor Department revealed consumer prices last month grew at the quickest rate in nearly 40 years.

Contra

Last week, Fed president James Bullard became the first central bank official to openly endorse a 50-basis-point hike in March. “I was already more hawkish, but I have pulled up dramatically what I think the committee should do,” Bullard said after the January inflation report, adding that he would “like to see” hikes totaling 100 basis points by July 1. He also raised the possibility of the Fed being open to an emergency rate increase, stating “there was a time when the committee would have reacted to something like this by having a meeting right now. . . . I think we should be nimble and considering that kind of thing.” Goldman says if another official joins Bullard in becoming more hawkish, it would reconsider its forecast for seven 25-basis-point hikes this year.

Topline

Key Facts

What To Watch For

Key Background

Contra

Further Reading