Fed 'virtually certain' to raise rates in March, says First Trust

The Federal Reserve stayed the course on Wednesday, as a statement from the central bank reflected no change in the Fed Funds rate, and no change in the pace of tapering. There was also no shift in the timetable for hiking rates, and no evidence that they plan to do so in bigger increments.

But even as the Fed held the line on policy, economists at First Trust maintained that unless something changes in the broad picture of the economy, the Fed will inevitably raise interest rates.

“Barring a sharp change in the economic outlook, the Fed looks virtually certain to raise the Fed Funds rate by 25 basis points at the March meeting,” Chief Economist Brian S. Wesbury and Deputy Chief Economist Robert Stein said in a note following the central bank’s statement.

Noting Fed Chair Powell’s conscious decision not to commit to a hike increase schedule, the two said that the Fed did provide clarification when it came to the balance sheet.

In addition to reaffirming that tapering will end in early March, the Fed also provided guidance on how it will reduce the size of the balance sheet. Some have questioned whether or not the normalization process will begin in March with rate hikes, but the Federal Reserve committee's decision indicates that it intends to wait until after rate hikes have begun.

“It was also notable that there was no indication that the Fed is considering the outright sale of assets,” the note said. “Instead, guidance mimicked reductions coming through the management of monthly reinvestments as occurred back in 2017.”

As the U.S. faces historic levels of inflation, Wesbury and Stein argued that rather than moving too quickly, the Federal reserve is taking on the greatest risk by moving too slowly.

“The Fed is behind the curve on fighting inflation, tapering should already be over, and rate hikes should already have begun,” they said. “Inflation is likely to remain stubbornly high throughout 2022 and beyond, and the biggest question today is how long it takes for the Fed to step up to the challenge.”