Stock exchanges, including Dow Jones, S&P 500, and Nasdaq Composite, plummeted to fresh session lows on Wednesday as Jerome Powell, Chairman of the Federal Reserve, signalled that the United States central bank would begin to steadily increase interest rates in mid-March to bring down inflation.
While the Dow recorded a drop of about 350 points (or 1 percent), the S&P 500 and Nasdaq Composite were down by 0.9 percent and 0.7 percent, respectively.
In his address after the two-day Federal Open Market Committee (FOMC) meeting (that started on Tuesday), Powell said the supply chain issues were taking longer to be resolved than the Fed had originally anticipated and that the rise in prices could accelerate. "There’s a risk that the high inflation we are seeing will be prolonged. There’s a risk that it will move even higher... We have to be in a position with our monetary policy to address all of the plausible outcomes," said Powell.
He quickly added that increasing the short-term interest rate won't hurt the labour market. “I think there’s quite a bit of room to raise interest rates without threatening the labour market... Job openings currently outnumber unemployed Americans," Powell pointed out.
The Fed Chairman also said that the central bank would need time to unwind its massive balance sheet. "The balance sheet is substantially larger than it needs to be... There’s a substantial amount of shrinkage in the balance sheet to be done. That’s going to take some time," Powell told reporters.
He added that the Fed Reserve will "phase out asset purchases" as the economy is strong enough without intense monetary policy support. "We’ve seen remarkable progress in the labour market... The economy no longer needs sustained high levels of monetary policy support," said the Fed Chairman. He, however, cautioned that "persistent real wage growth in excess of productivity could put upward pressure on inflation".
Powell assured markets of the Fed Reserve's commitment to maintaining price stability. “We will use our tools both to support the economy and a strong labour market and to prevent higher inflation from becoming entrenched,” he said.
Meanwhile, economic experts have said that the markets should now take a sigh of relief as the Federal Reserve has provided some clarity on when and how much it will raise interest rates.
(Edited by : Thomas Abraham)