For the past several months, economists, politicians have been raising their voices against accommodating monetary policy. They are demanding blunt force of interest rate spike to cool off inflation, which is the worst at 7.2% in the past 40 years.
With the Fed planning to raise interest rates from zero over the course of years to come. Markets across the globe faced a sell-off for the whole past week, and all eyes are set for the two-day meet starting Wednesday.
All are gearing towards embracing the dramatic shift in the monetary policies. Jerome Powell, Fed Chairman will update the central bank’s plans for the economy. The expectations are that he will start interest rate hikes, starting from March.
How will the Fed increase interest rates, and tighten monetary policy?
The Fed has many tools under its control that it can use to reverse the policy changes made. They have already started its purchase of mortgage-backed securities, and treasuries. This can allow them to raise interest rates.
The Reserve can now reduce its whopping $9 trillion in holdings of securities. They will not re-up their bonds, thus allowing them to regulate interest rates. The market ahead of the meeting, sharply fell with, Dow industrial average by 800 points, and S&P by 500 points on Monday.
Economists believe that what the economy needs is a continuous supply of young and productive labor to achieve growth. And what the world and the markets do not believe or expect is a shock as it can spiral the economy down.
What lies ahead?
Fed’s move is under stringent watch as other factors are closing in to add on to the slow economic growth. Diminishing impacts of fiscal stimulus approved by Congress during 2020 and 2021.
Also, the failure of Biden’s Build Back Better, and not to forget the recent market sell-offs led by leading technology companies. Although the Fed is not influenced by political interference, their movements can have a political impact.
All eyes are set on Fed as if the policy changes do not meet the expectations or create shock, it can lead to a recession. Thus, it will be interesting to see how the Federal Reserve is going to take this important decision and announcement ahead!
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