Fed likely to pave the way for March rate hike at key meeting this week

The Federal Reserve is expected to signal its first interest rate hike in three years during a pivotal two-day meeting this week, opening the door to a March liftoff as policymakers seek to combat the hottest inflation in four decades.

There is broad support among central bank officials to begin aggressively normalizing policy amid growing concern over the rapid increase in consumer prices, which surged 7% in December, the Labor Department said earlier this month. It marked the fastest pace for inflation since 1982 as consumer demand confronts a shortage of goods caused by congested ports and other pandemic-induced disruptions in the supply chain.

The Fed began tapering its bond purchases in November by $15 billion a month, and announced during its December meeting that it would double that to $30 billion beginning in January. Under that timeframe, the central bank is poised to conclude the program by March, allowing Fed officials to begin hiking interest rates and reducing the $8.8 trillion balance sheet. 

"It is really time for us to move away from those emergency pandemic settings to a more normal level," Chairman Jerome Powell said earlier this month while testifying before the Senate Banking Committee. "It’s a long road to normal from where we are."