Chicago Booth professor of economics and former Fed governor Randall Kroszner weighs in on Federal Reserve chair Jerome Powell's intentions to raise interest rates; Revere Securities' Scott Fullman shares his stock picks.
Most Federal Reserve officials agreed last month that surging inflation and an incredibly tight labor market could warrant a faster-than-expected pace of interest rate hikes this year as policymakers look to combat soaring prices.
Minutes from the U.S. central bank's Jan. 25-26 meeting show that many policymakers believe the current economic conditions could necessitate a quicker normalization of policy than in 2015, though they stressed that this outlook ultimately hinged on financial developments. The Fed kept rates ultra-low for years following the 2008 financial crisis, only raising them once at the end of 2015. Officials subsequently raised rates eight more times over a three-year period.
MOST SMALL BUSINESSES SINCE 1974 ARE HIKING PRICES TO OFFSET INFLATION
"Compared with conditions in 2015 when the Committee last began a process of removing monetary policy accommodation, participants viewed that there was a much stronger outlook for growth in economic activity, substantially higher inflation, and a notably tighter labor market," the minutes said. "Consequently, most participants suggested that a faster pace of increases in the target range for the federal funds rate than in the post-2015 period would likely be warranted, should the economy evolve generally in line with the Committee's expectation."
People shop for groceries at a supermarket in Glendale, California, Jan. 12, 2022. (Robyn Beck/AFP via Getty Images / AP Newsroom)
Although central bank officials have left rates unchanged since March 2020, they indicated broad support during their two-day January meeting to begin raising rates amid growing concern over the rapid increase in consumer prices. A rate increase would mark the first since December 2018.
"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 Fed said in its post-meeting statement last month.
Although policymakers did not provide an exact timeline for the interest rate liftoff, they hinted it could take place during their meeting on March 15-16. The minutes reinforced that sentiment, with officials indicating they plan to raise rates "soon" and that they will begin reducing the $9 trillion balance sheet shortly thereafter.
"There’s nothing really concrete when it comes to a timeline, so there’s still a big question mark there," said Mike Loewengart, managing director of investment strategy at E*Trade. "But the bottom line is rate hikes are coming, and they’re coming soon. Investors should keep in mind that even with a few hikes, rates will remain very low by historical standards, so while they may create volatility, in the long term investors should take it in stride."
Federal Reserve Chair Jerome Powell pauses during a news conference in Washington on Jan. 29, 2020. (AP Photo/Manuel Balce Ceneta, File / AP Newsroom)
The Fed already began slowing its bond purchases last year and is on track to conclude the program in early March, allowing policymakers to begin hiking interest rates and reducing a $9 trillion balance sheet. It is unclear when the central bank will begin shrinking its bond holdings, although officials said in the statement that they would start "in a predictable manner" primarily by adjusting how much they will reinvest as their bond holdings expire.
Many Wall Street banks, including Goldman Sachs and Bank of America, now expect the Fed to raise rates seven times this year in order to quell rising inflation. The possibility of seven rate hikes this year is also gaining traction among traders: According to the CME's FedWatch tool, traders are now pricing in over a 60% chance of an increase at every Fed meeting this year.
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Fed Chairman Jerome Powell has left open the possibility of a rate hike at every meeting this year and has refused to rule out a more aggressive, half-percentage-point rate increase, but he said it's important to be "humble and nimble." In addition to its March meeting, the Fed has meetings in May, June, July, September, November and December.
"We’re going to be led by the incoming data and the evolving outlook," Powell told reporters during the Fed's January meeting.
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