The U.S. Federal Reserve left its key interest rate unchanged but said "with inflation well above 2 percent and a strong labor market, the Committee (the Fed's policy-making body) expects it will soon be appropriate to raise the target range for the federal funds rate," a message financial markets expected.
The Federal Open Market Committee (FOMC) also said it had decided to "reduce the monthly pace of its net asset purchases, bringing them an an end in early March," with a reduction in the size of its balance sheet to begin after the benchmark federal funds rate has been raised.
The Fed kept its target for the federal funds at 0.0 to 0.25 percent, unchanged since March 2020 when the rate was lowered twice in a single month by a total of 1.50 percentage points.
The Federal Open Market Committee (FOMC) also said it had decided to "reduce the monthly pace of its net asset purchases, bringing them an an end in early March," with a reduction in the size of its balance sheet to begin after the benchmark federal funds rate has been raised.
The Fed kept its target for the federal funds at 0.0 to 0.25 percent, unchanged since March 2020 when the rate was lowered twice in a single month by a total of 1.50 percentage points.
Today's statement continues the Fed's pivot toward monetary tightening after the policy stance was kept ultra easy for five quarters while economic activity gradually recovered from the devastating hit from the COVID-19 pandemic and inflation rose.
In November 2021 the Fed finally joined the global trend toward monetary tightening - central banks raised rates 124 times last year to combat rising inflation - and trimmed its monthly purchases of Treasury securities and mortgage-backed securities.
In December last year the Fed then sped up the pace of monetary tightening further by trimming asset purchases even more and dropped its description of inflation as "transitory" as it raised its forecast for inflation and projected three rate hikes of 25 basis points each in 2022 and another three in 2023.
With inflation continuing to rise - headline inflation hit 7 percent in December, the highest since June 1982 from 6.8 percent - Fed Chairman Jerome Powell this month kept up his hawkish message, describing inflation as a "severe threat" to a Senate hearing on Jan. 11, boosting market expectations the Fed may even raise rates four times this year.
Today marks another critical step forward in the normalization of global monetary policy and follows on the heels of the Bank of Canada's message earlier today that interest rates need to be raised.
As in December, the Fed said economic activity and employment have continued to improve though there are still risks to the outlook from new variants of the virus, such as the Omicron variant.
However, the Fed also acknowledged inflation is "well above" its 2 percent target and the labor market was strong, the two conditions it had laid out in order to tighten monetary policy.
To wrap up its asset purchases - known as Quantitative Easing (QE) and used as an addition tool to ease policy - the Fed said it would purchase at least $20 billion of Treasury securities at least $10 billion of agency mortgage-backed securities in February to continue to smooth market functioning and support the flow of credit.
However, next month will be the final month of asset purchases that will end in early March.
The Fed said a reduction of its balance sheet - which contains some $8.8 trillion of bonds and securities - "will commence after the process of increasing the target range for the federal funds rate has begun."
