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Truth behind shock US interest rate decision

·2-min read
Close up on US currency and US Federal Reserve chair Jerome Powell speaking after announcing the centrals banks interest rate decision.
US Federal Reserve chair Jerome Powell has indicated interest rates will rise in March. (Source: Getty)

The US Federal Reserve has kept interest rates on hold despite rising inflation and increased pressure to make a move.

This comes after Federal Reserve chair Jerome Powell flagged that the bank would be lifting rates numerous times this year.

At the post-meeting press conference, Powell reaffirmed that the bank would be lifting rates “soon”, but they would remain steady for the time being.

“Today … the Federal Open Market Committee kept its policy interest rate near zero and stated its expectation that an increase in this rate would soon be appropriate,” Powell said.

“Against a backdrop of elevated inflation and a strong labor market, our policy has been adapting to the evolving economic environment, and it will continue to do so.”

So, what are the Fed’s plans moving forward?

Reducing fiscal support

Powell first wants to see the effects of removing fiscal support from the economy.

Quantitative easing (QE) is a form of unconventional monetary policy in which a central bank purchases longer-term securities from the open market, which helps to stimulate the economy.

Basically, the Fed (much like the Reserve Bank of Australia) was pumping a great deal of money into the US economy to assist during the COVID-19-induced lockdowns.

The Fed has started pulling back this buying - at a faster rate than the market initially expected - and will stop this form of QE in March this year.

“In light of the remarkable progress we have seen in the labor market and inflation that is well above our 2 per cent longer-run goal, the economy no longer needs sustained high levels of monetary policy support,” Powell said.

“That is why we are phasing out our asset purchases and why we expect it will soon be appropriate to raise the target range for the federal funds rate.”

Four rate rises

The US central bank is expected to raise interest rates about four times this year.

Investors have been preparing for the prospect of the Fed moving from a loose to a less loose, or tighter, monetary policy setting, CommSec chief economist Craig James said.

“The issue in more recent days has centered on how aggressive the Fed will be in lifting rates,” he said.

“That is, there is a debate by analysts about how many times the Fed could lift rates and whether one or some of the moves are 50 basis points (bp) rather than just 25bp.”

CBA international economists expect four rate hikes in 2022, starting in March.

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