Fed Tees Up March Interest-Rate Increase

The central bank approved one final round of asset purchases, which will bring that stimulus program to a conclusion by March. Officials continued deliberations at their two-day meeting over how and when to shrink the Fed’s $9 trillion securities portfolio, which has more than doubled since March 2020. The Fed released a separate one-page statement that spelled out high-level principles to guide that process.

The Fed cut short-term interest rates to near zero and started buying bonds to lower long-term rates in 2020 as the coronavirus pandemic hit the U.S. economy, triggering financial-market volatility and a deep, short recession.

Officials pledged to hold interest rates near zero until inflation was forecast to moderately exceed 2% and until the labor market returned to levels consistent with maximum employment.

The Fed indicated in its statement that these goals were effectively met. The central bank also removed a key opening sentence from its statement that it had used since March 2020 to signal it would aggressively support growth amid an unprecedented global pandemic.

Brisk demand for goods and shortages for intermediate goods such as semiconductors have pushed inflation to its highest 12-month readings in decades. Inflation rose 5.7% in November from a year earlier, using the Fed’s preferred gauge, and easily surpassed the Fed’s first objective.

But it has been developments in the labor market that provided greater urgency in recent weeks for the Fed to accelerate plans to raise rates much faster than officials anticipated last summer.

Sharp wage gains and a historic drop in the unemployment rate over the second half of last year—to 3.9% in December from 5.9% in June—led officials Wednesday to declare their employment-related goal had also been achieved.

Write to Nick Timiraos at [email protected]