The Fed announced it would raise interest rates in March, coinciding with the end of the tapering program. The US dollar also strengthened rapidly.
In its policy announcement on Thursday morning (27/January), the Federal Reserve kept its benchmark interest rate at 0.25 percent and signaled a rate increase in March. This decision was taken following the rising inflation in recent times.
"With inflation well above the 2 percent level and conditions in the US labor market increasingly solid, the Fed's policy-making committee expects to immediately raise interest rates at its next meeting (in March)," the Fed said in a statement after the interest rate announcement. .
March was chosen because the tapering program officially ended that month. Please note, the Fed decided to double the rate of tapering in December 2021 to be able to end the tapering program in March 2022.
The press conference conducted by the chairman of the Fed, Jerome Powell, further confirmed the market view that the US central bank has now shifted to a more aggressive hawkish stance.
Very high inflation has forced the Fed to abandon the "price pressures are only temporary" narrative. The imbalance between supply and demand has been the cause of the spike in US inflation so far. In addition, the labor market is increasingly solid as indicated by the US unemployment rate dropping below 4 percent; back to pre-pandemic levels.
Market participants' responses were mixed after the Fed's policy announcement last night. Wall Street is betting that March's rate hike will be followed by three more hikes this year, starting with a reduction in the balance sheet next summer. However, some other market participants voiced concerns regarding the reduction of the balance sheet and the increase in interest rates at the same time.
"I personally would like to see the Fed hike once and then use a balance sheet versus a rate hike... Doing both simultaneously can be very difficult for the market," said John Luke Tyner, portfolio manager at Aptus Capital Advisors.
US Dollar Index Soars
Although in line with expectations, the Fed's hawkish statement this time managed to encourage the strengthening of the US Dollar. The US Dollar Index (DXY) rose rapidly to 0.54 percent in the previous trading session, and was still strengthening at around 96.60 at the time of writing.
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