The Federal Reserve raised its key interest rate by a quarter of a percentage point on Wednesday as policymakers took their first decisive step in trying to tame rapid inflation by cooling the economy.
The Fed had kept rates close to zero since March 2020, and the decision marked the first hike since 2018. Policymakers also forecast six more similar hikes over the course of 2022 as inflation hits a 40-year high.
“With appropriate strengthening in the stance of monetary policy, the commission expects inflation to return to its target of 2 percent and the labor market to remain strong,” the Fed said in its March statement, noting that the commission “anticipates sustained increases in target range will be appropriate.”
The Fed is at a turning point after two years of trying to help the economy recover from the damage done by the global pandemic. As the coronavirus continues to disrupt trade around the world, the United States economy has recovered rapidly. The US job market has quickly bounced back from the massive job losses caused by the pandemic, which pushed unemployment to 14.7 percent, and companies are now struggling to find workers.
An increase in consumer spending has helped inflation rise to levels not seen since the 1980s. Rather than repeating the post-recession anemia of 2007-2009 — a recession that left millions of job applicants out of work and inflation lukewarm despite years of troughs — the backlash from the pandemic was powerful.
Judging by inflation, it could even be too hot, which is why the Fed is trying to slow the economy down to a more sustainable pace.
“The economy is very strong,” Fed chairman Jerome H. Powell said at a news conference after the announcement. He called recent growth “robust” and the outlook “firm”, noting that the labor market is “extremely tight”.
The invasion of Ukraine and related events is a “downside risk”, he said, noting that the “financial and economic implications for the global economy and the US economy are highly uncertain”.
Higher interest rates will trickle out through the markets to make mortgages, car loans and corporate loans more expensive. This is expected to slow consumption and investment, slowing demand in the economy and – Fed officials hope – ultimately dampen rising prices.
Target rate of the federal funds
Periods of Fed
rate increases
Target rate of the federal funds
Periods of Fed rate hikes
Central bankers laid out a more aggressive plan to contain inflation than in December, when they last released economic projections. Officials now expect rates to increase to 2.8 percent by the end of 2023, based on the median estimate, up from 1.6 percent in their earlier projections. That’s high enough to amount, according to the Fed’s own estimates, to slowing the economy — not just a foot off the accelerator.
“They knew their policies didn’t fit the economic backdrop, and this is catching up,” said Priya Misra, head of global rate strategy at TD Securities. “They are sending a harsh message that they expect to have to slow growth to get inflation under control.”
With the help of their policy changes, central bankers still expect inflation to slow on its own this year, but worry that a meaningful slowdown will take time.
The Fed’s quarterly economic forecasts, released along with the rate decision, showed that officials expected inflation to hover around 4.3 percent by the end of 2022. While that’s an increase of less than 6.1 percent in the 12 months to January, it’s well above the Fed’s target. of 2 percent.
James Bullard, the president of the Federal Reserve Bank of St. Louis, voted against the commission’s decision because he favored a larger half-point rate hike.
In its statement, the Fed addressed the potential economic implications of Russia’s invasion of Ukraine directly.
“Russia’s invasion of Ukraine is causing enormous human and economic problems,” he said. “The implications for the US economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh economic activity down.”
As the Fed raises rates, in part because inflation is so rapid, officials have also taken solace in labor progress. Unemployment has fallen sharply, there are many vacancies and there are too few employees to make ends meet.
The Fed is aiming for both price stability and maximum employment, and central bank officials have indicated that the labor market is meeting the latter goal, though they hope more workers will return for fear of easing the coronavirus and childcare problems linked to it. fading away with school shutdowns and other virus-limiting measures.
A thriving labor market has helped wage growth soar as employers compete for workers and try to keep their existing workers by paying more. Higher compensation could fuel inflation in the long run, some economists worry: It gives workers more resources to spend, and it abandons companies to cover rising labor costs.
