The Federal Reserve indicated on Wednesday that it could soon raise interest rates for the first time in three years.
The Fed's policymaking group said a quarter-percentage point increase to its benchmark short-term borrowing rate is likely forthcoming. It would be the first increase since December.
Inflation is running at its hottest level in nearly 40 years. Markets in recent days have been choppy as investors worried that the Fed might tighten policy even more than expected, despite the fact that the move toward less accommodative policy has been well-telegraphed over the past several weeks.
The Federal Open Market Committee did not give a specific time for the increase to come, but it could happen as soon as the March meeting. The statement was unanimously adopted.
The Committee expects it will be appropriate to raise the target range for the federal funds rate. The Fed doesn't meet in February.
The committee noted that the central bank's monthly bond-buying program could end in March at the same time that rates increase.
There was no indication when the Fed might start to reduce its holdings of bonds.
The committee released principles for reducing the size of the balance sheet.
The benchmark funds rate is the primary means of adjusting the stance of monetary policy, according to the policy sheet.
The document said that the Committee is prepared to adjust any of the details of its approach to reducing the size of the balance sheet in light of economic and financial developments.
Markets were waiting for the Fed's decision. Government bond yields were mostly higher, though only slightly.
The Fed is expected to start hiking rates this year, but investors are pricing in a more aggressive schedule than the officials indicated in December. The committee penciled in three 25 basis point moves this year, while the market was pricing in four hikes, according to the FedWatch tool.
The funds rate is currently pegged at zero, but traders are expecting it to go up to 1% by the end of the year.
Consumer prices are up 7% from a year ago, the fastest 12-month pace since the summer of 1982.
The easiest monetary policy in Fed history has been made easier by the persistence of inflation. The central bank slashed its benchmark rate to a target of 0.05% in the early days of the Covid epidemic and has been buying billions of dollars in Treasurys and mortgage-backed securities each month.
The Fed has nearly $9 trillion in assets on its balance sheet. The Fed is expected to wait a few months and allow some of the proceeds from its bond holdings to run off each month. All of the proceeds are reinvested by the Fed.
Markets were waiting for more information about when the reduction in bond holdings might begin from Fed Chairman Powell. Goldman said a few days ago that it expects balance sheet reduction to begin in June at a pace of $100 billion a month, double the pace of previous moves.