Citing elevated inflation and a strong labor market, the Federal Reserve indicated Wednesday that it plans to begin raising interest rates “soon.”
The Fed left interest rates unchanged at near-zero levels as widely expected but said the Federal Open Market Committee expects “it will soon be appropriate to raise the target range for the federal funds rate.”
The comments from the Fed were largely in line with expectations, as CME Group’s FedWatch Tool currently points to a 91.4 percent chance of a quarter-point rate hike at the next FOMC meeting in mid-March.
In an effort to combat the economic impact of the coronavirus pandemic, the Fed has left interest rates at zero to 0.25 percent since March of 2020.
The Fed previously pledged to leave interest rates unchanged until labor market conditions have reached levels consistent with the FOMC’s assessments of maximum employment.
The central bank also said it would further reduce the pace of its bond purchases to $30 billion per month beginning in February, with the Fed saying it expects to end its asset purchase program by early March.
The plans to tighten monetary policy come as the Fed said indicators of economic activity and employment have continued to strengthen.
The Fed also continued to describe inflation as “elevated,” citing supply and demand imbalances related to the pandemic and the reopening of the economy.
Noting risks to the economic outlook remain, the Fed reiterated it would be prepared to adjust the stance of monetary policy as appropriate.
In a separate statement, the Fed outlined plans to significantly reduce the size of its balance sheet, saying it expects to start the reductions after it begins raising interest rates.
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