Federal Reserve officials will release a fresh policy statement on Wednesday in which they are expected to signal that rate increases are coming soon as policymakers react to a strengthening economy and maneuver to keep price gains under control amid a burst of inflation.
Economists do not expect the Fed to lift rates, which are set at near-zero, at this meeting, and officials will not release new economic projections until March. But the January announcement comes as the Fed pivots away from an economy-stoking policy setting and toward one that will keep consumer and business demand in check â€” which promises to make it a closely watched event on Wall Street.
Investors expect Fed officials to begin raising their policy interest rate in March and to make four increases in total this year, moves that will make borrowing to buy a house, a car or new company equipment more expensive. Policymakers are already in the process of slowing a bond purchase program they had been using to strengthen the economy by keeping longer-term interest rates low, and they have signaled that they could begin to shrink their asset holdings soon after they begin to raise rates.
Officials clearly have a trifecta of policy moves planned, but investors are watching eagerly to see just how aggressively the Fed carries them out. Will policymakers simply let the short-term debt on their balance sheet run its course without reinvestment â€” allowing securities to â€œrun offâ€ â€” or will they actively sell bonds to remove support from the economy even faster? Will they raise rates three times this year, as their December economic projections suggested, or will they make additional increases?
The central bankâ€™s policy announcement may not answer all of those questions, but it will be followed by a news conference with Jerome H. Powell, the Fed chair, and market players will parse his words for any hint of how fast the Fed plans to move.
Economists have begun to wonder if the policy-setting Federal Open Market Committee might pursue a rapid path toward higher interest rates as prices rise at the fastest pace in 40 years, wage growth comes in strong and the coronavirus sticks around, dashing hopes that the economy will get back to some sort of more normal trajectory in which workers will return to the labor market to ease shortages.
â€œWe see a risk that the F.O.M.C. will want to take some tightening action at every meeting until that picture changes,â€ economists at Goldman Sachs wrote in note previewing the central bankâ€™s meeting this week.
Fed officials expect price increases â€” which came in at 5.7 percent in November, based on their preferred measure â€” to moderate toward their 2 percent goal this year. Even so, they have acknowledged that there is a risk that they will remain elevated for an uncomfortably long time. Unemployment has fallen swiftly, and could soon return to prepandemic levels.
Markets have been gyrating in the lead-up to the Fedâ€™s meeting, unnerved by the possibility that the Fed will act swiftly â€” and tank asset prices in the process. Low interest rates and bond purchases have helped to make companies profitable and have nudged money out of safe assets like Treasury bonds and into riskier ones like stocks. Higher rates could stop, or at least quiet down, the party on Wall Street.
But some economists have argued that it is unlikely that central bank officials will unveil any big moves Wednesday â€” they typically prefer to preview that changes are imminent, and havenâ€™t done so.
â€œA case could be made for the Fed to stop shortâ€ on bond purchases earlier than its planned March end-date, Michael Feroli, chief U.S. economist at J.P. Morgan, wrote in a note ahead of the Wednesdayâ€™s meeting. Doing so would allow them to stop juicing the economy at a moment of hot inflation, he wrote, but he doubted it would happen.
â€œWhile this may have merit, the Powell Fed has been loath to shock markets on meeting days, preferring to signal any pivots in speeches and media reports,â€ Mr. Feroli wrote.
Much of the news from the meeting could come down to the tone Mr. Powell strikes.
â€œWe think he will talk up the economy without sounding apocalyptic on inflation and prepare the ground for a March liftoff,â€ Roberto Perli and his colleagues at Cornerstone Macro wrote in a research note ahead of the meeting.