As Fed meets, investor angst over rate hikes spooks markets

WASHINGTON (AP) — Wild volatility in the stock market this week has put heightened scrutiny on the Federal Reserve's meeting Wednesday and whether the Fed will clarify just how fast it plans to tighten credit and potentially slow the economy.

With high inflation squeezing consumers and businesses, the Fed is expected to signal that it will raise its benchmark short-term interest rate in March in a dramatic reversal from the ultra-low-rate policies it imposed during the pandemic recession. To further tighten credit, the Fed also plans to end its monthly bond purchases in March. And later this year, it may start reducing its huge stockpile of Treasury and mortgage bonds.

Investors fear there may be still more to come. Some on Wall Street worry that on Wednesday, the Fed may signal a forthcoming half-point increase in its key rate. There is also concern that at a news conference, Fed Chair Jerome Powell could suggest that the central bank will raise rates more times this year than the four hikes most economists expect.

Another wild card — particularly for Wall Street — is the Fed’s bond holdings. As recently as September, those holdings were growing by $120 billion a month. The bond purchases, which the Fed financed by creating money, were intended to reduce longer-term rates to spur borrowing and spending. Many investors saw the bond buying as helping fuel stock market gains by pouring cash into the financial system.

Earlier this month, minutes of the Fed's December meeting revealed that the central bank was considering reducing its bond holdings by not replacing bonds that mature — a more aggressive step than just ending the purchases. Analysts now forecast that the Fed could begin shrinking its holding as early as July, much sooner than was expected even a few months ago.

The impact of reducing the Fed's bond...