The Fed again gives signs that in March it will begin to raise the interest rate

The United States Federal Reserve (Fed), It continues to fight against inflation that does not let up, but its first monetary policy meeting of this 2022 ended without major surprises. The world’s largest central bank said, as the market expected, that it will begin to increase interest rates “soon”, something that analysts translate as the adjustment would begin in March.

for Uruguay the gradual rise in rates would have as one of its most immediate effects the increase in the value of the dollar, in line with the strengthening of the US currency globally. The other effect can occur on the side of an increase in the cost of financing in the international debt markets.

“With inflation well above 2% and a strong labor market, the committee expects it will soon be appropriate to raise the target range for the federal funds rate,” the Federal Open Market Committee (FOMC) said. it’s a statement.

When the Fed raises the rate, it will make its first hike in more than three years, since December 2018, which is estimated to be 0.25 percentage point. Since the pandemic broke into the US economy in March 2020, the rate has been anchored in a range of zero to 0.25%, where it currently remains, as a stimulus for recovery.

In this sense, the entity chaired by Jerome Powell explained that it decided to continue reducing the monthly pace of bond purchases, which implies that the process would conclude at the beginning of the third month of the year. In February – the month the Fed does not meet – the FOMC will buy just $30bn, down considerably from the $120bn it bought each month for much of the pandemic.

Now all eyes – both from market analysts and from the public – continue to point to the Fed because the world’s largest economy is facing inflation that has not been seen in almost 40 years. The Consumer Price Index (CPI) closed 2021 with a rise of 7% in 12 months, something unprecedented since June 1982.

Powell noted that high inflation has imposed significant hardship on people, saying the Fed will use its tools “both to support the economy and a strong job market and to prevent higher inflation from taking hold.”

He added that, in his opinion, “There is plenty of room to raise interest rates without threatening the labor market.” And he detailed that “in light of the remarkable progress” seen in the labor market and inflation that “is well above” the long-term objective of 2%, the economy no longer needs sustained high levels of support from monetary policy. . The official specified that, although it is not his baseline scenario, “there is a risk that high inflation will continue. There is a risk that it will rise even more.”

The reaction of the markets

After the expected adjustment in March, the market estimates that during this 2022 the Fed would make three more rate hikes, to continue with new increases next year. Stocks in the United States had started the day higher this Wednesday, but suffered a setback after the press conference of the president of the Federal Reserve

At the close, the Dow Jones index fell 0.38%, the S&P 500 fell 0.15% and the Nasdaq technology remained stable. Meanwhile, the yield on the 10-year US Treasury bond exceeded 1.85%. Rate hikes make fixed income more attractive, to the detriment of risky assets like stocks. The uncertainty that has won over investors has been reflected in the high volatility of the main stock indices, which have had sharp declines in the first weeks of the year.

The Observer and Financial Newspaper

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