The US Federal Reserve yesterday told investors to strap in for a rapid unwinding of the wave of cheap cash that has flooded global financial markets.
The most influential central bank sent the strongest signal yet that the era of ultra-loose monetary policy is coming to end.
The Fed’s committee of rate setters said they now think “it will soon be appropriate to raise” interest rates, confirming Wall Street’s expectations that the lift-off in borrowing costs will start in March.
The Fed’s abrupt hawkish tilt has been triggered by it prioritising eliminating rampant inflation in the US over the pandemic.
The rate of price rises across the pond hit seven per cent in December, the highest print since the 1980s.
Rates were held at 0-0.25 per cent, while the central bank’s QE programme will now end in March. The Fed also suggested it will offload assets on its balance sheet as it raises rates.
Jerome Powell, Fed Chair, said: “The economy no longer needs sustained high levels of monetary policy support.”
Wall Street plunged on the news as investors sobered up to the prospect of tighter policy.
The S&P 500 dipped 0.49 per cent, while th tech-heavy Nasdaq, which is highly sensitive to changes in US interest rates, fell 0.2 per cent.
US interest rates influence the world’s most important financial markets as they provide a floor to measure the value of all assets.
The Fed’s policy shift demonstrates the world’s top central banks are intending to flex their inflation fighting muscles in 2022 by launching a cycle of rapid rate rises.
On these shores, some City economists expect the Bank of England to lift interest rates four times this year, taking them to 1.25 per cent by the end of 2022, starting at the Bank’s next meeting on 3 February.