Federal Reserve points to strengthening economy, signals it will hike interest

The Federal Reserve on Wednesday said it would hold the line on short-term interest rates, with an eye toward raising them “soon,” and said it would pare down the rate of its asset purchases, bringing them to a halt in early March.

The interest rate hike is widely expected to happen in March, at the conclusion of its next policymaking meeting — and almost exactly two years to the day after it slashed rates to zero in response to the emergence of a fast-spreading novel coronavirus that threatened to destabilize the entire financial system. 

Fast-forward to 2022 and the macroeconomic climate has changed markedly: Today, the greatest economic worry for many is rapidly escalating prices of food, fuel, housing and a host of other goods and services.

“It’s a very important meeting, because the next meeting is within six weeks, and the hawkish pivot from the Fed was quite substantial,” said David Norris, partner and head of U.S. credit at TwentyFour Asset Management. 

Fed officials released a policy statement Wednesday afternoon, prior to a press conference with Federal Reserve Chairman Jerome Powell. According to the CME’s FedWatch Tool, market participants expect a quarter-percentage-point (25-basis-point) rate hike at that March meeting with near-90 percent probability.

In addition to interest rates — its best-known policy tool — the Fed also kept monetary policy loose over the past two years by buying billions of dollars in Treasuries and mortgage-backed bonds every month, a process it has begun winding down. These purchases have nearly doubled the Fed’s balance sheet over the past two years, and Wall Street is also looking for Fed officials to offer guidance on when and how fast they will begin paring back the amount of those holdings, either by letting them drop off as they mature or by selling them.

“What took the market by surprise in December was the notion that they made quantitative tightening a near-term issue,” said Keith Buchanan, portfolio manager at Globalt Investments. “That introduced to the market the idea of those simultaneous measures, which set the stage for what we saw in January” — specifically, the dramatic market swings and elevated volatility as traders tried to game out the financial impact of policymakers growing more worried about inflation marring economic growth in 2022.

A slow trajectory is generally in keeping with the Fed’s measured, deliberate pace of monetary policy adjustment. As an institution, the central bank tends to adopt a long run-up of communication before taking action. But when conditions change quickly, this can leave the Fed playing catch-up — a position that gives Wall Street heartburn, and is one of the culprits market observers blame for the wild gyrations the major indices have undergone in recent days. 

“Historically, the Fed is really looking to calm markets… but calming markets after such an intense bout of volatility is going to be difficult,” Norris said. 

The Fed realized — too late, according to Norris — that the price…