Hoping to beat back inflation, Fed prepares to raise interest rates in March

After downplaying the threat of inflation through most of last year, the Federal Reserve struck a more hawkish tone Wednesday as it signaled readiness to raise interest rates in March and take other aggressive actions to combat high prices endangering the nation’s economic health.

With inflation running at its highest level in four decades, Fed officials in recent days have been laying the groundwork to make their first rate hike since slashing it to near zero as the pandemic was starting to intensify two years ago.

Investors and analysts are expecting at least two or three more quarter-point rate increases later this year. The Fed is also looking at tightening the country’s money supply further by shrinking its huge portfolio of bonds and securities that the central bank purchased to lower long-term interest rates and stimulate economic activity.

As recently as last fall, policymakers took a patient approach as inflation was heating up, seeing rising prices as a temporary consequence of supply chain problems and other factors related to the pandemic.

But in a statement Wednesday issued at the conclusion of a two-day meeting, the Fed made clear that it no longer held such a benign view of inflation, and that its policy focus had pivoted from maximizing employment to its other chief goal: achieving price stability.

Fed Chair Jerome H. Powell is likely to discuss the central bank’s policies and thinking on inflation and the economic outlook at a news conference Wednesday afternoon.

Economists worry that inflation may already be entrenched – it reached 7% in December — and that the Fed could step on the economic brakes too hard and send the country into recession. Doing too little, on the other hand, risks slow economic growth combined with high inflation, a condition known as stagflation, something the nation struggled with in the 1970s.

To avoid getting into such a tight spot, Fed officials historically have sought to take preemptive steps to control inflation. In the 1950s then Fed chair, William McChesney Martin, famously stated that the job of the central bank is to take away the punch bowl just as the party gets going.

“Well, the party is well under way,” said Phil Levy, chief economist at Flexport, a San Francisco-based freight shipment and customs brokerage company.

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