After its first policy meeting in 2022, the US Federal Reserve said it is likely to hike interest rates in March, for the first time in more than three years and confirmed plans to end its bond purchases, introduced during the coronavirus pandemic, in the Fed’s battle to control surging inflation.

The US central bank signaled that the policy making group is looking for a quarter-percentage point increase to its benchmark rates (that will be the first hike since December 2018).

The US inflation rose further in December, with annualized figures rising from 6.8% in November to 7.0% in December, which marks the biggest year-on-year increase in nearly forty years, countering the stance of the central bank and President Biden’s administration, which have characterized soaring prices as a transitory phenomenon sparked by supply chain issues during the pandemic.

The consumer prices surged and holding well above the central bank’s 2% target, lifted by rising prices on supply chains issues, the latest wave of coronavirus infections, led by Omicron variant and growing wage pressures, boosting expectations that the US central bank will start tightening the monetary policy and make the first rate hike as early as March.

The separate data showed US consumer spending fell in December, warning that the economy lost traction heading into the new year hurt by persisting supply chains problems and raging coronavirus infections, while so-called PCE deflator – the indicator that tracks the average increase in prices for all domestic personal consumption – rose by 5.8% in December from 5.7% in November, signaling that annual inflation increased at a pace last seen in 1982.

Consumer spending dropped mainly due to surging coronavirus infections which reduced traffic to high contact venues, such as restaurants and bars, while the early start of holiday shopping season in October, also contributed.

On the other hand, gross domestic product data showed that the US economy grew by 5.7% in the fourth quarter, compared to a 2.3% rise in Q3, boosting overall growth in 2021 to 5.7%. This is the strongest in nearly four decades, after the economy contracted 3.4% in 2020.

The Fed Chair Jerome Powell said the Federal Open Market Committee is on course to raise the federal funds rate at the March meeting, assuming that the conditions are appropriate for doing so, adding more details to a FOMC policy statement which only stated that rates would rise soon.

In his speech after the end of the central bank’s January policy meeting, Powell said that much was left undecided, including the pace of subsequent rate hikes or how quickly officials will let its massive balance sheet decline.

The central bank’s action will depend on the pace the inflation will fall from its current multi-decade highs and return towards Fed’s 2% target, however, Powell was explicit on one key point – that the central bank will end the extraordinary support it has provided to the US economy during the coronavirus pandemic – despite high inflation and no signs that it has peaked so far.

Powell said, inflation has not improved, but it has probably worsened since the Fed's December policy meeting, suggesting that if the situation deteriorates further, the Fed’s policy will have to reflect that.

Powell highlighted that 2022 is going to be a year in which the Fed will move steadily away from the very highly accommodative monetary policy, introduced to deal with the economic effects of the pandemic.

He emphasized that the US economy was in a very different place than it was in 2015 when it started the last tightening cycle, with stronger growth, a stronger labor market and much higher inflation. It suggests that the Fed is planning to raise rates faster than in the previous tightening cycle.

The FOMC penciled in three 0.25% hikes this year, while many market participants expect four rate increases and anticipate a funds rate by the end of the year of about 1%, from its current near-zero range.

The US dollar reacted positively to the Fed chair’s hawkish comments and advanced against its major counterparts, registering the biggest weekly advance in seven months and hitting the highest since early July 2020.

Upbeat US GDP data contributed to positive sentiment on more details about the long-awaited Fed’s first post-pandemic rate hike, while growing geopolitical tensions over Ukraine boosted safe-haven appeal and provided additional support to the greenback.

However, traders remain cautious as the Fed sent the strongest signal about rate hike so far, but the pace of the central bank’s following steps is still unclear as the policymakers will be looking for more evidence on how inflation, the latest wave of coronavirus infections and the economy will overall react in coming months.

This article was submitted by Windsor Brokers.