The Federal Reserves’ head, Jerome H. Powell, has indicated an approaching increase in the interest rate in March. This will happen in order to control the rising inflation across the United States.
This possible policy shift from the Biden administration fueled turmoil in labor markets last week.
Fed to raise interest rates in March
Speaking to a news conference on Wednesday, the Fed chair claimed the American labor market is “very strong,” so raising the interest rate in March is possible without undermining the market.
The speculations about the government’s decision to increase the interest rates were already high, which tumbled US stock markets.
BREAKING: FED leaves rates unchanged, points to interest rate hike in March.
Stocks moving higher on FED notes. https://t.co/gzoojWP5DU
— Sawyer Merritt (@SawyerMerritt) January 26, 2022
For the federal government, increasing the interest rates is the primary tool to curb inflation before the midterm elections, as it can prove to be a liability for Democrats.
Since the beginning of the pandemic, the government has kept interest rates near zero in its bid to facilitate the economy.
Companies and consumers are likely to recalibrate their spending habits after the latest announcement; the flow of cash in the economy would nosedive with the increasing interest rate.
Economic recovery came at a big price
According to the Washington Post, while the economic indicators showed positive results last year, they all came at a high cost.
Despite the fact almost 6.4 million jobs were created in 2021, and stimulus packages from Congress fueled economic growth, inflation rose to a 40-year high, which is worrying the administration.
Even though the Fed claimed inflation would only impact sectors badly hit by the pandemic, it was widespread across every corner of the economy.
This mounting challenge raised concerns for the Fed to reduce inflation by keeping the employment numbers intact.
The Fed hopes to achieve this by raising the interest rate at a position to which they believe they’ve achieved the “maximum employment” level in America.
Although Powell did not indicate how many times he is eyeing to raise the interest rate this year, he opined the Biden administration would see data and respond accordingly.
According to Joe Brusuelas, who is a chief economist at a multinational network of accounting firms RSM, Powell tried to calm down market anxiety by not outlining the detailed plan of the government to play with the policy rate.
– Fed acknowledges nerves in the market.
– Mentions inflation caused by supply bottle necks easing.
– No interest rate hike now.
– Interest rate hike toward end of first quarter.
– Tapering of balance sheet MAY being later in the year.
Markets respond bullish!
— Ran NeuNer (@cryptomanran) January 25, 2022
He believed this tactic could help him in keeping markets functional, while not pushing them into chaos.
Reportedly, policymakers and bureaucrats are likely to make some crucial decisions next week, as the government releases the GDP report on Thursday.
Powell stated this year, the government would move away from the accommodative monetary policy, which was introduced in the pandemic.
Even though the latest omicron wave gave a lethal blow to the economy, and consumers have been reluctant to spend money, Powell touted the economy is in good condition. The effects of the omicron variant will, therefore, settle quickly.
During Powell’s hearing earlier this month, Republican Senator Patrick Toomey expressed relief about the fact the Fed at least acknowledged rising inflation.