Chairman Jerome Powell said Wednesday that he supports a traditional quarter-point increase in the Federal Reserve’s benchmark short-term interest rate when the Fed meets later this month, rather than a larger increase that some of its policymakers have proposed.
The debate over how quickly to raise interest rates is being closely watched by financial markets and also could have an impact on the broader economy.
Federal Reserve Governor Michelle Bowman said Monday that she was open to lifting interest rates by more than the traditional quarter-point at the central bank’s next meeting in March.
According to the latest data released Thursday by Freddie Mac, the 30-year fixed-rate average has spiked in the last six weeks to 3.92%.
Fed officials are expected to raise their benchmark short-term rate several times this year beginning in March. But economists have increasingly suggested that the Fed has waited too long to unleash its inflation-fighting tools.
With high inflation squeezing consumers and businesses and unemployment falling steadily, the Fed also said it would phase out its monthly bond purchases, which have been intended to lower longer-term rates, in March.
Fed officials now expect to raise short-term interest rates three times this year, a sharp shift from September, when they were divided over doing it even once. Economists increasingly expect them to raise rates at least four times in 2022.
The Fed also said it will likely begin slowing the pace of its monthly bond purchases “soon” if the economy keeps improving. The bond purchases have been intended to lower longer-term loan rates to encourage borrowing and spending.
In a speech being given virtually to an annual gathering of central bankers, Federal Reserve Chairman Jerome Powell stressed that the beginning of tapering does not signal any plan to start raising the Fed’s benchmark short-term rate.
The Federal Reserve is edging toward an announcement that it will begin paring the pace of its Treasury and mortgage bond buying, which now amounts to $120 billion a month.
Federal Reserve official James Bullard’s comments echo other recent calls from inside and outside the Fed that the central bank should start dialing back its ultra-low interest rate policies.
The discussions, revealed in the minutes of the Fed’s April meeting released Wednesday, marked the first time the central bank has even hinted that the time could be approaching to consider reducing the Fed’s $120 billion monthly bond purchases.
The Federal Reserve foresees the economy accelerating quickly this year yet still expects to keep its benchmark interest rate pinned near zero through 2023, despite concerns in financial markets about potentially higher inflation.
The speed at which the yield on the 10-year Treasury has climbed has forced investors to re-examine how they value stocks, bonds and every other investment. And the immediate verdict has been to sell them at lower prices.
Federal Reserve Chair Jerome Powell suggested Thursday that inflation will pick up in the coming months but the rise would likely prove temporary and not enough for the Fed to alter its record-low interest rate policies.
Banks have less than a year before the Fed has indicated it will stop allowing them to enter into new contracts pegged to LIBOR, a bedrock of the financial system being phased out by global policy makers.
Speaking at a news conference, Federal Reserve Chairman Jerome Powell made clear his belief that the economy will struggle in the coming weeks and months, until widespread vaccinations and government rescue aid eventually fuel a sustained rebound.
Behind the Fed’s new thinking is an ailing economy in the grip of a viral pandemic and a stubbornly low inflation rate that has long defied the Fed’s efforts to raise it.
Chairman Jerome Powell stressed the Fed’s commitment to ultra-low borrowing rates for the foreseeable future. “We’re not thinking about raising rates,” he said. “We’re not even thinking about thinking about raising rates.”
The central bank said the effects of the outbreak will weigh on economic activity in the near term and pose risks to the economic outlook.
